Hyundai Rotem Co. is facing a credit rating downgrade as it suffered a massive loss last year due to a provision set aside for construction losses.
Investment banking (IB) industry sources said on Jan. 29 that Korea Investors Service Inc. (KIS) and NICE Investors Service Co. (NIS) are considering downgrading Hyundai Rotem’s credit rating outlook. The company currently has an “A” credit rating.
Hyundai Rotem announced that it posted 657.1 billion won (US$587.22 million) in consolidated sales and 213 billion won (US$190.35 million) in operating loss in the fourth quarter last year. Its sales shrunk by 12.7 percent compared to a year earlier, while its operating loss expanded. The company had an annual operating loss of 196.2 billion won (US$175.34 million) and a pre-tax loss of 324.1 billion won (US$289.63 million) last year.
Hyundai Rotem recognized about 140 billion won (US$125.11 million) of provisions for losses incurred from the Qatar water treatment project in the fourth quarter of 2018. In addition, the burden of fixed costs and the increase in estimated costs of some projects in the railway sector partly made the company run into red figures. For the water treatment project in Qatar, the company already recognized an additional cost of 130 billion won (US$116.18 million) due to a design change in 2017 before recognizing an additional loss of 140 billion won (US$125.11 million) last year. Considering the fact that the project has been finished only 60 percent, the company’s performance can fluctuate until its completion. Its consolidated debt ratio surged from 188 percent at the end of 2017 to 260 percent last year owing to a large-scale net loss.
Despite a massive order backlog, investors are advised to additionally check on Hyundai Rotem’s performance in the future. The company’s total order backlog reached 8 trillion won (US$7.15 billion) as of the end of last year as its order receipts improved mainly in its main railway sector after 2016.
The KIS said, “It is positive that Hyundai Rotem has expanded its earnings foundation. However, its exposure to risks from exchange rate fluctuations and external environments has increased because most of the orders come from overseas. It needs to be checked if the company can stably create profits through quality orders. The burden of fixed costs is growing as the period of sales reflection even in expanded order backlog has postponed. The company can face the overload of operation rates from the rapid expansion of mass production, burden of working capital anddelivery delay and quality issues in the future.”
The NIS also said, “Considering the fact that Hyundai Rotemhas secured a large-scale order backlog and most orders are related to railway projects with a low level of business risks, the company is expected to improve its business showings in the future. However, it will have a limited improvement in its financial structure in the short and medium term in light of the heavy tail structure of overseas orders, under which payments are made upon delivery.”