AkzoNobel Q2 margins disappoint, questions over specialty chems valuation – Barclays

LONDON (ICIS)–Margins were the big disappointment in AkzoNobel’s second-quarter results but market expectations for a potential renewed takeover bid by US’ producer PPG may be insulating the company’s share price from the impact of the Dutch paints and coatings major’s underperformance, investment bank Barclays said on Monday.

The bank’s analysts added the Specialty Chemicals division, which the company plans to list on the stock exchange, could be valued at €7.3bn, based on an analysis of the division’s operations, well below the range of €8-12bn the company is aiming for.

However, after a turbulent year so far in which AkzoNobel’s management managed to fend off an acquisition bid by PPG, Barclays said the company’s share price belies the 6.9% miss in the company’s second-quarter earnings before interest and taxes (EBIT), hinting that the market may still be focused on a renewed PPG bid. AkzoNobel’s first-quarter EBIT which came in at €461m.

The company was not immediately available for comment at the time of writing.

“The -6.9% EBIT miss was met with +30bp [basis points] relative share price outperformance indicating the extent to which the market is focused on the chances of a re-bid from PPG far more than operating performance,” said Barclays.

“In a sense, bad news is good news if it precipitates a deal. PPG cannot come back to the table until 1 December and the shares are likely to tread water until then.”

The bank said it had placed its 12-month share price target forecast at €62 apiece, slightly up from its previous forecast.

The new share price target forecast would prompt a downside risk of nearly 20% as per the closing price on 4 August at €77.15. The shares were trading by 13:00 London time on Monday at €77.35.

According to Dutch law, when an acquisition bid is rejected the potential buyer has to wait six months until attempting a fresh bid.

After a case in the business court in the Netherlands, and confronted with a hostile management at AkzoNobel, PPG withdrew its offer on 1 June.

Following PPG’s big, the company accelerated plans to list on the stock exchange the Specialty Chemicals division, according to the former head of that division and current CEO of the company, Thierry Vanlacker, in an interview with ICIS in May.

“To be honest, we would probably have taken a couple months more to work on some of the scenarios but there was a lot of logic to announcing it immediately,” Vanlacker said at the time.

Vanlacker has only been in the post for two weeks after the former CEO Ton Buchner’s resignation was unexpectedly announced on 19 July on health grounds.

Barclays’ analysts were not upbeat about future performance, adding the strengthening euro may also damage AkzoNobel’s prospects as a large percentage of its revenue comes from non-euro jurisdictions. The mix could be aggravated by higher raw materials costs, said the bank.

Moreover, the analysts came back to their analysis tracking home improvement spending in the UK, with the bank concluding that there was a sharp slowdown in that industry in the traditionally-strong second quarter, which could affect AkzoNobel, whose Dulux paints brand is a familiar name among UK consumers.

“Margins were the big disappointment in Q2 [second quarter]. For some time, we’ve been sceptical that AkzoNobel can defend itself against sharply higher raw materials, despite insistence from the company that earnings this year would be broadly unaffected,” said the bank.

“We agree the outgoing quarter is likely to be the point of peak pain but are less optimistic that the net pricing erosion suffered at the start of the painting season can be fully offset by December. The disappointing result in Marine [coatings division] came as a big surprise to us after Q1 data suggested trends were stabilising,” the bank said.

Barclays downgraded its estimates for both AkzoNobel’s earnings and sales going forward, and noted how the company has prioritised growth instead of volumes the way other producers have done.

“While PPG has been defending margin at the expense of volume it’s clear that AkzoNobel has prioritised growth. This is in keeping with its new strategic trajectory but we hope it won’t come at too great a cost.”

The bank concluded saying that, while it is “logical” to think Specialty Chemicals would manage its own cash flow once it becomes an independent company, past performance would not give room for too much optimism as the division has achieved a “flat result” over the last 10 years.

While the company has started its initial public offering (IPO) marketing campaign stating the division’s market capitalisation could stand around the €8-12bn mark, the bank estimated its own valuation at €700m lower than the low range of the company’s forecasts at €7.3bn.

“Our UW [underweight] thesis is based on a more pessimistic outlook for Specialty Chemicals. The division sits within our sum-of-the-parts at €7.3bn, well below the €8-12bn consensus average quoted by the company,” said the bank.

“However, the company’s internal target to achieve 4% volume growth p.a. [per annum] is significantly above the flat result achieved over the last decade. Even our below-guidance growth forecasts assume AkzoNobel can outdo its previous best on a consistent basis. Nothing in these [second-quarter] results has persuaded us to change that view.”

On 26 July, analysts at Bernstein Research also downgraded their earnings forecast for AkzoNobel going forward on the back of the second-quarter financial results.

Pictured above: Tins of paint at a UK store. Falling home improvement spending in the country, one of the headwinds for AkzoNobel, according to Barclays
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