INSIGHT: AkzoNobel’s broad base will be tested in 2009

12 December 2008 11:37  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The sharp downturn of the past months is being felt across broad swathes of the sector, so pockets of demand and margin resilience are not easy to spot.

Some segments, however, might be expected to do better than the crowd. The industrial gases and agrochemicals businesses, although excluding fertilizers, spring to mind.

This is a time to accentuate the positives, certainly, though a healthy dose of realism would not go amiss when talking to investors and other stakeholders.

The chemicals sector may not be the “flavour of the month” with investors. Indeed, this could be a particularly tough period on the world’s stock markets for all of them.

But some companies are better placed than most. Some segments look more robust in the face of what is likely to be a tough recession.

“We understand that the company wants to highlight its strengths, but we remain concerned that there wasn't enough focus on the weaknesses - at least not when it comes to managing investor expectations,” Credit Suisse chemicals analysts in the UK said of a recent meeting with AkzoNobel.

AkzoNobel makes decorative paints and industrial coatings and has a specialty chemicals business. At the start of this year it completed its €11bn acquisition of UK-based paints maker ICI.

It has had a good story to tell: one of an expanded product portfolio; new geographical reach; and consolidation. Until the tide turned against chemicals, it was one of the most strongly promoted chemicals stocks.

But times change and AkzoNobel is falling out of favour with analysts who worry about the firm’s exposure to chemicals industrial demand and, increasingly, to industry-led market weakness.

True, the former ICI paints business is strong in places like Brazil and China. It, as well as AkzoNobel’s industrial coatings operations, is not that exposed to the weakening oil barrel.

The company argues that its emerging market turnover and profitability are strong. It is the world’s largest coating supplier. The breadth of markets served by the group as a whole gives it a degree of stability.

But it is a degree of stability in what are turning out to be extremely turbulent times.

AkzoNobel’s financials need not necessarily be cyclical. The company rates 74% of the business as having very low to low exposure to cyclical end-markets and 26% moderate to high. Coatings margins have proved to be relatively resilient.

The company had a strong first three quarters and last month was reconfirming the full year outlook: EBITDA (earnings before interest, tax, deprecation and amortisation) before any exceptional items, and in constant currencies, close to last year’s pro-forma level of €1.87bn and a new floor to the dividend to €1.80 a share.

It did admit that the market for paper chemicals was softening and that polymer chemicals were falling short of previous performance. It said that demand remained healthy across its base chemicals and surface chemistry businesses.

But it is just these areas that worry the financial community. “We do not see significant risk of Akzo missing its FY08 guidance given the strong performance over the first nine months of the year,” Credit Suisse said. “However, we continue to see potential for disappointment into 2009.”

Not surprisingly, those concerns rest on the performance of the specialty chemicals and the performance coatings segments. Investors have paid a lot of attention to the decorative coatings side of the business but perhaps not so much on these two other important parts of AkzoNobel.

Price and volume declines in these businesses are inevitable in a deflationary and recessionary environment, Credit Suisse said, particularly for a business so geared with slowing markets.

Price deflation and lower raw material costs probably won’t be enough to prevent a fall in margins, as the AkzoNobel CFO is reported to have said on Monday. Credit Suisse sees earnings declines of 9.4% in 2009, though the consensus view is still for some growth.

The recession is going to hit hard across a large part of the chemicals sector and there are few defensive stocks. Not surprisingly, analysts suggest agrochemicals and industrial gases as being the most attractive parts of the sector now.

Companies like AkzoNobel have a lot to prove in 2009. Just how resilient are they in a global downturn? And just how important, as times get harder, is the potential for stronger synergies with newly acquired businesses?

AkzoNobel is challenged to make the ICI acquisition work, to learn from it and grow with it. At the same time, it is moving into a period where previous widespread restructuring in its former coatings businesses and in chemicals must be expected to prove its worth.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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