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Investing.com -- S&P Global Ratings has revised its outlook for Suntory Holdings Ltd. and its U.S. subsidiary, Suntory Global Spirits Inc., from stable to positive. The ’BBB+’ long-term issuer credit rating and long-term senior unsecured debt ratings for both companies have been affirmed. This change in outlook is due to the company’s increased financial resilience to external changes over the next one to two years, as indicated by the debt to EBITDA ratio.
Suntory Holdings has demonstrated steady cash flow and conservative financial management, leading to further reductions in debt. Despite a challenging operating environment, the company is expected to continue to improve its financial health. The company’s sales are projected to grow by about 3%-4% annually over the next one to two years, and its EBITDA is anticipated to increase modestly to about ¥500 billion annually, up from about ¥460 billion in the fiscal year ended Dec. 31, 2024.
The company’s profitability is expected to remain stable at around 15% due to its shift to premium products in the spirits business and expanded market share in the beverage business. Suntory Holdings has also managed to reduce its balance of debt to about ¥900 billion at the end of December 2024, down from ¥1.05 trillion in the fiscal year ended Dec. 31, 2023. This reduction was achieved by strengthening its profit base and selling non-core businesses.
S&P Global Ratings expects the company’s debt-to-EBITDA ratio to be about 1.8x-2.0x over the next one to two years. The company’s discretionary cash flow (DCF) is expected to remain profitable after dividends, despite continued high levels of capital investment to expand supply capacity and strengthen distribution networks.
The positive outlook reflects the belief that Suntory Holdings will continue to reduce its debt over the next one to two years through growth investments and management of shareholder returns as EBITDA increases further. If the company’s debt to EBITDA remains stable at around 2x due to further reduction of debt and EBITDA continues to expand due to increased brand strength in core product categories and appropriate cost management, S&P Global Ratings will consider upgrading the company.
However, the outlook may be changed back to stable if the balance of debt increases significantly due to aggressive growth investments, including large acquisitions, and a decline in the willingness to maintain hybrid capital. Similarly, if debt to EBITDA increases again from about 2x toward 2.5x as a result of a decline in EBITDA due to the inability to pass on supply chain costs to commodity prices, the outlook may also be revised to stable.
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