“Credit Checkpoint” is a column that assesses the credit rating risks of companies preparing to issue corporate bonds by examining their financial structure and cash flow. It evaluates a company’s short- and medium-term financial stability by focusing not only on the figures in the financial statements but also on the quality and sustainability of its cash flow. We highlight key financial indicators and potential risk factors to help corporate bond investors and market participants assess a company’s creditworthiness from a more comprehensive perspective. <Editor’s Note>

[E-Daily Marketin Reporter LEE GEON-EOM ] POSCO FUTURE M(003670)is continuing its earnings recovery trend, driven by a return to profitability in its energy materials division. Last year, the company improved its financial metrics through a rights offering and restructured its debt maturities to focus on long-term obligations. However, analysts note that as capital expenditure needs persist, the speed at which the company restores its operating cash flow generation will be key to alleviating its financial burden.

According to the financial investment industry on the 3rd, POSCO FUTURE M will conduct a bookbuilding process on the 4th to issue corporate bonds worth 100 billion won. The offering will be divided into 2-year and 3-year maturities, and the company plans to increase the issuance amount to a maximum of 200 billion won depending on the results of the bookbuilding. NH INVESTMENT & SECURITIES, KB Securities, Korea Investment & Securities, KIWOOM Securities, and SamsungSecurities are serving as lead underwriters.

The market is viewing the company’s earnings rebound and the potential for support from the POSCO Group favorably. On the 28th of last month, Korea Ratings Corporation maintained POSCO FUTURE M’s credit rating at AA- (Stable). At the same time, there is growing attention on the company’s borrowing trends due to investment burdens.

Energy Materials Division Returns to Profit… Operating Profit Up 2.5-Fold

POSCO FUTURE M’s consolidated revenue for the first half of this year was 1.437 trillion won, a 4.6% decrease compared to the same period last year. In contrast, operating profit rose 147.7% to 44.4 billion won, and net income also increased 131.2% to 30.9 billion won. The operating profit margin improved by 1.9 percentage points, from 1.2% to 3.1%.

The rebound in earnings was driven by the Energy Materials division. Thanks to the reversal of inventory valuation losses resulting from rising lithium prices and the securing of alternative demand sources—such as power tools—the Energy Materials division’s operating profit turned from a 23.2 billion won loss in the same period last year to a 1.5 billion won profit. The Refractories and Lime division, which has a sales base within the POSCO Group, also posted an operating profit of 43 billion won, providing a floor for earnings. The decline in revenue was due to sluggish sales of cathode materials for electric vehicles (EVs) following the expiration of U.S. EV subsidies.

Cash flow also improved. Cash flow from operating activities turned positive, rising to 189 billion won from a deficit of 71.8 billion won in the same period last year. As large-scale investments, such as the cathode material plant in Canada, entered the final stages, the free cash flow (FCF) deficit also narrowed significantly from 941.8 billion won to 174.2 billion won.

Financial indicators also improved. This is the result of implementing self-rescue measures, including a 1.107 trillion won rights offering last year and the sale of subsidiary stakes and idle business sites. The debt-to-equity ratio fell from 50.5% in the same period last year to 43.2%, and the net debt-to-equity ratio decreased from 114.4% to 75.1%. As the company refinanced short-term debt with long-term funding, short-term borrowings also fell by 32.6%, from 1.0085 trillion won at the end of last year to 679.9 billion won. Their share of total debt decreased from 25.5% to 16.4%.

Persistent FCF Deficit… Controlling Investment Scale Is the ‘Key’

However, the scale of profit recovery has not yet reached a level sufficient to cover investment costs. As the free cash flow (FCF) deficit persisted, total debt rose to 4.152 trillion won, a 5.1% increase from the end of last year. According to Korea Ratings, the EBITDA-to-net debt ratio stood at 11.7x, down from 13.6x at the end of last year, but it still exceeds the 5x threshold—a key indicator for a downgrade.

The scale of future investments is also cited as a key variable. POSCO FUTURE M plans annual capital expenditures (CAPEX) of 800 billion won for remaining domestic and international investments. To respond to the energy storage system (ESS) market, the company is also investing in a new plant through a joint venture with CNGR, a global manufacturer of lithium iron phosphate (LFP) cathode materials.

The success of its efforts to diversify its customer base is expected to determine the pace of its earnings recovery. POSCO FUTURE M plans to target the European EV market with mid- to low-priced products such as mid-nickel and LMR, while supplying NCA cathode materials to SAMSUNG SDI CO.,LTD. and others for the U.S. ESS market to offset sluggish demand for U.S.-bound EVs. Korea Ratings projected that once earnings recover after 2027—driven by increased production volumes and the completion of investments—the net debt-to-EBITDA ratio will decline to the mid-4x range.

Min Won-sik, a senior researcher at Korea Ratings Corporation, analyzed in a report, “There has been no sharp deterioration in financial stability thanks to the rights offering and the implementation of self-rescue measures,” adding, “Coverage ratios need to be improved through future earnings recovery and a reduction in investment burdens.”

He continued, “If the scale of new investments expands, the timing of debt burden relief may be delayed,” adding, “It will be possible to control the financial burden by improving coverage and repaying debt through medium- to long-term internal cash generation.”