OREANDA-NEWS. February 12, 2016. Following better-than-expected 2015 results, Fitch Ratings says that Carlsberg Breweries A/S's (Carlsberg) credit metrics are likely to return to a level more commensurate with its Issuer Default Rating (IDR) of 'BBB', in particular after breaching our leverage sensitivity over the previous two years. Successful execution of cash preservation measures meant that free cash flow (FCF) returned last year to 2012 levels above DKK4bn (equating to around a 6.8% FCF margin, which is strong for its rating).

The company has a clear commitment to - and ability to achieve - further deleveraging; Fitch therefore expects it to maintain its credit profile despite ongoing macroeconomic issues in Eastern Europe and a challenging operating environment in some of its key markets. This underpinned Fitch's affirmation of Carlsberg's IDR with a Stable Outlook in February 2015.

Carlsberg reported solid financial results for 2015 with cash flows from operating activities increasing to DKK10bn from DKK7.4bn in 2014. The reduction in capex and proceeds from recent divestments of non-core assets (totalling DKK1.1bn for the group) have allowed the company to reduce its net interest-bearing debt by DKK5.7bn to DKK30.9bn. As a result, net debt/EBITDA was 2.3x in 2015 (2014: 2.7x), mildly better than the company's earlier guidance of 2.5x. Based on 2015 group results, we estimate that Carlsberg's funds from operations (FFO) adjusted net leverage returned to below 3.5x in 2015 from 4.0x in 2014.

Carlsberg's commitment to maintaining a conservative capital structure and focus on operating efficiencies should result in a stable credit profile. In addition, the company has reiterated its stance on no further large M&A. We view positively the company's conservative financial policy as we estimate that its 2016 operating performance will remain pressured by challenges from its major markets. Although Carlsberg's reliance on the Russian market has reduced over the last few years (22% of group EBITDA in 2015 vs 46% five years ago), Russia remains the single largest market for the company. We continue to expect it to be a major drag on reported revenue and profits in 2016.

Although Carlsberg has demonstrated a good track record of growing its Asian business, muted growth prospects in the core Western European market (55% of group EBITDA in 2015) and continued challenges in China will mean little scope for material EBITDA growth over 2016-2017.

Meanwhile, we believe that an upcoming merger of the two global industry leaders, Anheuser Busch InBev NV/SA (ABI; 'A'/RWN) and SABMiller plc (SABM; 'A-'/RWN), is unlikely to materially impact the competitive landscape for Carlsberg in Europe, at least not immediately, given that we expect the enlarged ABI/SABM entity will be focusing on integration and on paying down debt. The lack of a geographic stronghold in Europe for ABI/SABM - especially after the recent news on the potential disposal of part of SABM's European business, including beer brands Peroni, Grolsch and Meantime, to Japanese Asahi Group Holdings - in our view, means there will be no additional meaningful competitive pressures for Carlsberg in Europe.