Credit Suisse initiates AkzoNobel coverage with 'underperform' rating

13 October 2011 11:57  [Source: ICIS news]

LONDON (ICIS)--Investment bank Credit Suisse has initiated coverage of Dutch-based AkzoNobel with an “underperform” rating and a €39.50/share ($54.86/share) target price, it said on Thursday.

The specialty chemicals and paints maker’s earnings before interest and tax (EBIT) for 2012 are expected to be below market forecasts, on the back of sustained end-market weakness in residential housing across Europe and the US, the analysts added.

AkzoNobel is exposed to residential construction markets across Europe, Americas, and Asia. AkzoNobel volumes are therefore heavily dependent on residential activity levels in these markets,” analysts said.

Credit Suisse said that European and North American residential activity is near 50-year lows.

The analysts forecast that European construction markets are likely to deteriorate further before getting better, due to above average unemployment levels, low consumer confidence and the inability to access finance, which will place ongoing pressure upon AkzoNobel’s volumes.

“Despite the recovery from 2009 troughs, European housing completions (across our sample of the top 17 countries) are still tracking 18% below 10 year averages,” Credit Suisse analysts said.

US housing/construction is also struggling and industry experts do not foresee a rapid recovery in the markets over the next 12 months, analysts said.

They added that AkzoNobel’s performance coatings and specialty chemicals segments, which are exposed to global industrial activity levels, could also be put under pressure by the volatile global economic markets

Meanwhile, amid a declining demand environment, paint producers like AkzoNobel could struggle to pass through raw materials cost inflation to paint prices, which in conjunction with lower volumes has resulted in margin pressure, analysts said.

Credit Suisse said that AkzoNobel has suffered from significant input cost inflation, titanium dioxide (TiO2) in particular, within the past year and estimates a further 15% TiO2 price increase in the market for October which will place further pressure on the group’s operational margins.

They said that the company could struggle to fully pass through the cost of rising inputs in a weakening demand environment.

“A global economic downturn may provide the only relief on input cost inflation. In this scenario our primary concern surrounds the potential for further paint/coatings demand decline,” they said.

“We acknowledge management has done a commendable job battling a ’perfect paint storm’ over the last three years. However, in the absence of an underlying demand pickup (not implicit within our forecasts), we believe significant operational/earnings leverage is unlikely,” the analysts added.

($1 = €0.72)

For more on AkzoNobel visit ICIS company intelligence


By: Franco Capaldo
+44 (0)20 8652 3214



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