Fundamental ViewAS OF 17 Mar 2023
We continue to believe Nissan Motor Co. and Nissan Motor Acceptance Corporation (NMAC) notes should trade cheap for their rating owing to the company’s weak core automotive profitability, excluding currency, and credit ratings that remain on the brink of high yield. On February 7, 2023, S&P stated in a bulletin that it believes Nissan achieving EBITDA margins of 6% and positive free cash flow “remains challenging”. Although Nissan appeared to meet both performance thresholds in the most recent quarter, it was only with the benefit of favorable currency. Without the favorable currency, we believe automotive profitability would have remained negative in its two most recent quarters, EBITDA margin would have been below 6%, and free cash flow would have been much lower if not negative.
Business DescriptionAS OF 17 Mar 2023
- Nissan, with headquarters in Yokohama, Japan, is a leading global automotive manufacturer with a market presence in many countries around the globe. The company’s growth investments are focused primarily on Japan, North America, and China, core markets with large profit pools in which Nissan has a meaningful market share. The company’s business in China is conducted through a joint venture with Dongfeng Motor Corporation.
- Nissan’s Sales Financing segment supports the sale of its vehicles by providing financing solutions to its customers and dealers. To enhance their creditworthiness, Nissan maintains keepwell (support) agreements with its wholly owned financial subsidiaries including Nissan Motor Acceptance Corporation (NMAC) in the United States and Nissan Financial Services (NFS) in Japan.
- The Renault-Nissan-Mitsubishi Alliance was established in 1999 to enhance member company scale in product development and raw material purchasing. The alliance includes equity participation, which led to Nissan holding ownership stakes in Renault (15% non-voting) and Mitsubishi (34%) and Renault holding an ownership stake in Nissan (43%). The Alliance’s automobile production volume is the third largest globally behind Toyota and Volkswagen.
Risk & CatalystsAS OF 17 Mar 2023
Management provides guidance for retail sales volumes but not for production volume or wholesales. It lowered its FY22 retail sales volume guidance for the second consecutive quarter to 3.4 mn units, down from a full-year target of 3.7 mn last quarter and its original target of 4.0 mn. Management indicated the lower target reflects continued industry headwinds from China COVID lockdowns, which have now largely ended, and semiconductor shortages, especially in North America.
The company reiterated its FY22 targets for revenue and operating profit based on modest changes in its currency outlook and the sustained strong pricing environment, partially offset by lower projected volumes. Management also highlighted improvement in raw material and logistics costs and noted it expects to offset the lower sales volume with improved productivity.
Management left its net income target unchanged. Net income is expected to decline sharply in FY22 owing to a Daimler share sale gain a year ago and a ¥100 bn loss in the current fiscal year related to its exit from Russia. Absent these one-time items, management noted its FY22 net income would have significantly increased YoY.
Key MetricsAS OF 17 Mar 2023
|¥ bn||FY18||FY19||FY20||FY21||LTM F3Q22|
CreditSights ViewAS OF 18 May 2023
We maintain an Outperform recommendation on NSANY and NMAC notes based on the new Fitch rating that gives the entities two of three Investment Grade (IG) ratings, expected inclusion in the BofAML ICE IG index, near-term debt issuance expectations that we believe could provide an attractive entry point into the credit for IG investors, and relative value. While our primary credit concern for Nissan is its weak core automotive profitability, we expect this to improve in FY23 based on a 27% increase in retail sales (ex. China) despite headwinds from currency and lower sales financing profitability.
Recommendation Reviewed: May 18, 2023
Recommendation Changed: April 26, 2023