Japan's top 100 non-financial firms to maintain strong credit trends in 2024

February 15, 2024 (MLN): Sustained revenue growth, stable profit margins and declining leverage are likely to keep the credit trends for Japan's top-100 listed non-financial companies (Fitch TSE100) healthy through 2024, says Fitch Ratings.

Eighty-seven companies in the Fitch TSE100 portfolio are projected to reduce net debt leverage from the fiscal year starting April 2022 (FY22) to FY24, based on Bloomberg Consensus Estimates (BEst).

The impact of the post-pandemic opening and recovery and the easing of supply-chain constraints in Japan and internationally, and the yen’s depreciation contributed to the strong aggregate revenue growth of the Fitch TSE portfolio.

The portfolio companies’ projected EBITDA more than covers their higher capex and dividend payments over FY22-FY24. BEst forecasts higher cash or lower net debt for the TSE100 portfolio. This, together with projected EBITDA growth, results in a decline in average EBITDA net leverage to 1.4x in FY24 from 2.2x in FY22.

Fitch’s expectation of the positive credit outlook is based on stable and low exchange rates, and no significant increase in yen interest rates.

A reversal of the exchange rate trend, with the yen appreciating, accompanied by a slowdown in the global economy, would reduce the revenue and EBITDA of companies with global operations, unless additional cost-reduction efforts are made.

Japanese yen interest rates, which are at absolute low levels, are highly likely to rise. This would have a limited but negative impact on Japanese companies’ free cash flow and financial flexibility.

Fitch expects Japanese companies to continue to expand overseas, driven by Japan's low economic growth and saturated domestic markets. Companies with accumulated cash are likely to increase investment if overseas interest rates fall and exchange rates stabilize. This could raise their currently low leverage.

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