Nexteer's leverage stays low despite soft interim results

    S&P Global Ratings said today it expects Nexteer Automotive Group Ltd. (01316)(Nexteer; BBB-/Stable/--) to keep its leverage low and gradually improve sales and profitability starting 2020, supported by a strong order book.
  The credit rating agency views Nexteer's credit profile to be stable despite weaker financial performance in the first half of 2019. The company's revenue fell by 10% year on year in the period. The decline was partly affected by sluggish global auto production.
  Nexteer's China exposure is focused on the lower end of the mass market, which had been particularly weak year-to-date. The loss of a steering column contract three to four years ago due to model transition at a major customer also started to hit revenue this year.
  Moreover, the U.S. dollar appreciation led to unfavorable currency translation.
  S&P anticipates Nexteer's revenue will recover moderately in 2020 with stabilizing global auto demand and the company continues to gain market share. It believes Nexteer's strong R&D capability and proven record in product delivery can help maintain its competitiveness in the volatile market.
  Its backlog of US$25.6 billion in orders as of end-June 2019 covers more than 6x annual sales, providing decent revenue visibility in the coming years. Nexteer's ongoing cost reduction measures and increase in regional production autonomy should also help it counter potential tariff and pricing challenges and deliver steady profit.
  S&P thinks Nexteer will likely maintain its net cash position in the next 12-24 months. It views the company's operating cash flow to be more than sufficient to cover a moderately increasing capital expenditure of US$350 million-US$400 million in 2019-2020, from about US$300 million in 2018. The company also can tolerate working capital pressure in the next one to two years to some extent, considering possible slower accounts receivable turnover.
  S&P's current assessment of Nexteer's credit strength incorporates potential short-term volatility in its leverage ratio due to severe but temporary distress in the global auto market.