INSIGHT: Akzo Nobel feels the financial pressure

03 October 2008 16:04  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--AkzoNobel this week has given some idea of the likely impact of the credit crunch and demand slowdown on chemicals.

The announcement of job losses and the halting of the share buy-back programme, particularly, have put current financial pressures into perspective.

The company is one of the world’s leading producers of industrial coatings and, since its acquisition of ICI, number one in decorative paints. It also makes a range of largely specialty chemicals.

The industrial side might be expected to show some relative strength as times get hard but the prognosis for the paints business in certain markets cannot be good.

Decorative paints is multi-national in the strictest sense, with markets having distinct national characteristics. The former ICI businesses are not well placed in the important US market.

The sharp decline in housing construction in the US and the construction downturn in Europe has put pressure on the business. And household disposable incomes have been hit by the credit crisis, putting pressure on the sales of products such as paints.

The decorative paints business, particularly, is buoyed by the household feel good factor and will suffer with the change in mood.

But the diversity of markets in decorative and the number market segments served in industrial coatings stand Akzo Nobel in good stead.

That and the fact that Akzo Nobel can drive costs down as it absorbs the ICI decorative paints business – and, indeed, learn some things from the way that business was run – are plus factors.

Akzo Nobel says it is exposure to cyclical end use markets is medium to high across 26% of the portfolio and very low to low across 74%.

The company, alongside most of its chemical industry peers at least, has been pushing hard into emerging markets where demand growth will be stronger driven purely by economic fundamentals.

The point is about much of the chemical industry is that there is significant potential for continued per capita demand growth across a wide range of businesses in the developing economies.

Yet AkzoNobel admits that the low growth, high cost inflation environment in mature economies requires a stronger focus on operational effectiveness, particularly in speciality chemicals.

The chemicals operations accounted for a third of turnover last year but 40% of group earnings before interest, tax, depreciation and amortisation after an excellent year.

Matching that performance will prove difficult in 2008, hence the decision to cut a further 3,500 jobs to try to achieve an additional €100m ($138m) of annual net cost savings beyond the €340m of synergy driven savings identified after the ICI takeover.

In challenging capital market conditions all companies will have to be prudent. In AkzoNobel’s case, that means that the remaining €1.6bn of its €3bn share buy-back programme has been deferred until it can complete the re-financing of €1.8bn of debt which is due over the next 18 months. Currently, it says, the capital markets are closed.

The pressure on the company has been recognised by market analysts with Credit Suisse cutting back its stock price forecast by 18% to €42 and its rating to neutral from outperform.

“We see limited scope for out-performance in the next year with a difficult economic outlook and painful cost-cutting,” the bank said in a stock update.

AkzoNobel may be less exposed to cyclicality than most but it will suffer from sector-wide negative stock price pressure.

“The market is currently short-termist and risk-averse, so every piece of negative news has an over-proportional effect on the share price. Investors are tired of hoping that this time the share price has bottomed out, and we believe many will take some time before re-examining the name,” Credit Suisse adds.

AkzoNobel demonstrates just how tough the credit market environment is. Its gearing is only 10% yet it cannot re-finance short-term bonds.

According to Credit Suisse, this provides another example of a company that was happy to buy its stock when it was expensive, but cannot now that it is cheap.

Akzo Nobel management also made it clear this week that the sale of National Starch's specialty starch business was in no way imminent.

The bank sees the sale of the business as increasingly hard.

AkzoNobel held its analysts day in London on Monday. By 14:26 GMT and amid continuing turmoil, its shares were at €34.48 on the Amsterdam Stock Exchange, down 2.9% from the close a week ago.

($1 = €0.72)

To discuss issues facing the chemicals industry visit ICIS connect

By: Nigel Davis
+44 20 8652 3214

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