Sharp Drops After Deutsche Cuts Rating Over Funding Needs

Sharp Corp. (6753), the worst performer on the Nikkei 225 (NKY) Stock Average with a 75 percent plunge this year, fell to the lowest level almost 38 years after Deutsche Bank AG cut its rating on concern cash flow won’t cover funding needs.

Sharp dropped 12 percent to 169 yen, the lowest level since at least September 1974, on the Tokyo Stock Exchange. Deutsche cut its recommendation to sell from hold and expects the stock to fall to 110 yen during the next 12 months, it said in a report dated yesterday.

Japan’s biggest liquid-crystal display panel maker had 362.5 billion yen ($4.6 billion) in commercial paper, compared with cash and savings of 217.7 billion yen, as of June 30, according to its earnings statement released Aug. 2. Sharp, the maker of Aquos TVs, is cutting 5,000 jobs after widening its annual loss forecast eightfold because of slumping demand for its sets.

The commercial paper will “be covered by increased short- term borrowings, and note that this level of funds cannot be covered from cash flow,” Yasuo Nakane, a Tokyo-based analyst at Deutsche (DBK), said in the report. “We cannot deny the risk of larger losses than we have estimated, with further structural reforms and radical business plan review pressuring the firm to post inventory valuation losses and reductions in deferred tax assets.”

Sharp expects a net loss of 250 billion yen for the year ending March 31, it said Aug. 2.

Goldman

Sharp had its credit rating cut by one level to BBB at Standard & Poor’s on Aug. 3. That’s the second lowest among S&P’s 10 scales of investment grades. Sharp has 200 billion yen of convertible bonds maturing in September 2013, data compiled by Bloomberg show.

“Relying heavily on commercial papers may not be a viable approach given that its credit rating has fallen due to deteriorating earnings,” Takashi Watanabe, a Tokyo-based analyst at Goldman Sachs Group Inc., said in a report yesterday.

Sharp would need to raise between 300 billion yen and 400 billion yen to prepare for redemption of commercial papers and convertible bonds next year, he said.

Goldman cut its 12-month price target on Sharp shares to 190 yen from 260 yen to reflect the lower earnings estimate.

Foxconn Technology Group, maker of Apple Inc. (AAPL) iPads, said Aug. 3 it plans to renegotiate the price of its planned investment in Sharp. Foxconn agreed in March to buy 9.9 percent of the Osaka-based company for 67 billion yen, or 550 yen per share. Sharp is trading about 69 percent below that price as of today.

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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