Korea-based POSCO's overall profitability jumps in 2014

Thanks partly to favorable steel fundamentals.

Moody's Investors Service says that Korea-based POSCO's financial results for 2014 were generally in line with expectations and will not impact the steel-maker's Baa2 ratings and stable outlook.

According to a release from Moody's Investors Service, POSCO's overall profitability improved in 2014 on the back of more favorable steel fundamentals as well as increased earnings in its non-steel businesses.

"We expect this growth momentum to continue into 2015," says Chris Park, a Moody's Senior Vice President.

According to POSCO, its consolidated and unadjusted operating income grew 7% year-on-year to KRW3.2 trillion in 2014, ending a decrease in the three consecutive years since 2011.

Here's more from Moody's Investors Service:

The rebound was mainly due to (1) a moderate improvement in its steel profitability, which was driven by lowered raw material prices; and (2) higher earnings in its non-steel businesses operated by its subsidiaries, such as natural gas development segment.

Moody's expects POSCO's operating income to grow by about 10% year-on-year in 2015, because of increased earnings in its non-steel businesses and the prolonged benefit of lowered raw material prices since H2 2014.

"POSCO's financial leverage in 2014 remained elevated due to a higher-than-expected debt level. However, we expect its financial leverage to improve in 2015 to a level that is consistent with its Baa2 rating," says Park.

POSCO's adjusted debt is estimated to have grown by about 4% year-on-year in 2014 owing to sizeable investments and large working capital deficits incurred at its non-steel businesses.

This situation resulted in its adjusted debt/EBITDA staying high at about 4.5x in 2014 based on Moody's estimate, slightly lower than the 4.7x posted in 2013. This level of leverage remains weak for its Baa2 rating.

However, Moody's expects its adjusted debt/EBITDA to improve to about 4.0x over the next 12-18 months, driven by the growth in earnings, lower capital expenditure, as well as deleveraging activities.

The recent disposal of its 52.3% stake in POSCO Specialty Steel Co Ltd (unrated), which will be effective in Q1 2015, should also help POSCO lower its financial leverage.