Moody's Investors Service said it has upgraded Ericsson’s corporate family rating (CFR) to Ba1 from Ba2 and the probability of default rating (PDR) to Ba1-PD from Ba2-PD. The rating agency has changed the outlook to stable from positive.
Ernesto Bisagno, a Moody's senior credit officer and lead analyst for Ericsson, said the upgrade to Ba1 reflects the successful execution of Ericsson's strategic plan, which is leading to a significant improvement in operating performance and margins. It also reflects the expected steady growth of the radio access network (RAN) market, on the back of contributions from 5G investments. This, combined with the contribution from new contracts and subsequent market share gains, will support profit growth and positive free cash flow generation.
Moody's does not expect Ericsson's operating performance to be materially exposed to the coronavirus outbreak, but there is increased uncertainty which could weigh on profits in the first half of 2020. In 2020, Moody's expects Ericsson's revenues to increase in the low-to-mid single digit range, in line with the growth of the RAN markets.
In 2021, the rating agency expects further improvement in profitability on the back increased contribution from the new contracts as the 5G cycle will enter a more mature phase. Moody's expects Ericsson to reach the low end of the operating margin targets of 12-14 percent over 2022-23.
Moody’s said the stable outlook reflects its expectation that Ericsson's operating performance will continue to improve, driven by a combination of positive organic growth in revenue, margin gains and ongoing positive free cash flow generation. The stable outlook assumes that it will reach its 10 percent operating margin target in 2020 with further progression thereafter, maintain its current market share in the global telecom equipment market, and keep a strong liquidity profile that would allow it to withstand potential downturns caused by technology cycles or changes in operating conditions.
