Celestica Inc. upgraded to ’BB+’ by S&P Global Ratings on strong performance

Investing.com -- S&P Global Ratings has upgraded the credit rating of Toronto-based electronics manufacturing services (EMS) provider, Celestica Inc (NYSE:CLS)., to ’BB+’ from ’BB’ due to its strong operating performance and robust momentum. The issuer’s credit rating for its senior secured revolver and term loan has also been raised to ’BBB-’.

Celestica (TSX:CLS)’s operating performance has exceeded expectations and continues to show positive momentum. The company’s S&P Global Ratings-adjusted debt to EBITDA is projected to stay below 1.0x with strong free operating cash flow (FOCF) generation through 2026. The stable outlook is based on the expectation that Celestica’s EBITDA expansion will lead to strong FOCF generation and S&P Global Ratings-adjusted debt to EBITDA of well below 2x for the next 12 months.

Celestica’s revenues grew 21% in 2024, primarily driven by strong demand for data center hardware from major hyperscalers. The company is expected to continue to see strong top-line growth in 2025, fueled by increasing AI adoption and demand for its networking and custom ASIC servers. The company has secured two 1.6T data center switch programs with hyperscaler customers and is exploring opportunities with digital native companies to diversify its customer concentration.

The company’s total revenue growth is projected to be about 11% for 2025. Its connectivity and cloud services (CCS) segment, which accounted for 67% of 2024 revenues, is expected to grow significantly due to higher HPS revenue. This growth is anticipated to be partly offset by lower enterprise revenue due to the anticipated technology transition in an AI/ML compute program with a hyperscaler customer.

Celestica’s advanced technology solutions (ATS) segment, which accounted for 32% of 2024 revenues, is expected to remain flat versus 2024 as the demand growth will be offset by revenue decline in the aerospace and defense segment from non-renewal of margin dilutive programs.

Celestica’s revenues and EBITDA margin surpassed its closest peer, Sanmina Corp., in 2024, due to significant high-margin growth the company has experienced with hyperscalers in recent years. The company’s favorable mix is expected to lead to continued deleveraging through 2026, leading to S&P Global Ratings-adjusted leverage of about 0.8x in fiscal 2025 and 0.7x in 2026.

Celestica had no borrowing under its accounts receivables securitization facility as of December 2024. However, S&P Global Ratings has conservatively assumed $200 million borrowing under this facility going forward, which is added to the adjusted debt calculation.

Celestica generated $673.2 million in S&P Global Ratings-adjusted free cash flow in 2024, benefitting from higher earnings. It is forecasted that Celestica will generate about $271.5 million of S&P Global Ratings-adjusted free cash flow in fiscal 2025 and $538.6 million in fiscal 2026, primarily from earnings growth.

The company has ample liquidity to support growth with $423.3 million cash on hand and $738.9 million available under its revolving credit facility after letters of credit as of December 2024. Management is expected to continue investing in organic growth and will consider share repurchases and acquisitions opportunistically going forward.

The stable outlook reflects S&P Global Ratings’ expectation that Celestica’s EBITDA expansion will lead to strong FOCF generation and S&P Global Ratings-adjusted debt to EBITDA well below 2x for the next 12 months.

A downgrade could be considered in the next 12 months if Celestica’s S&P Global Ratings-adjusted debt to EBITDA approaches 2x due to a soft demand environment for some of the company’s product lines, leading to declining EBITDA, or if Celestica adopts a more aggressive financial policy in terms of debt-funded shareholder returns and acquisitions, further pressuring leverage measures.

S&P Global Ratings stated that it is unlikely to raise the rating to investment grade within the next 12 months because Celestica’s operating scale and geographic or end-market diversification is weak relative to other investment-grade rated technology hardware companies, and the presence of larger players makes the industry competitive.

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