AkzoNobel profit warning not a particularly big surprise

Sunday, June 19, 2022 2:32 PM

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AkzoNobel’s profit warning last Tuesday was not a big surprise given the subsequent analyst comments.

However, analysts were forced to adjust their estimates, which were already below the 2023 target for the Amsterdam company itself and also lagged behind expectations for the second quarter.

Jefferies believes that the earnings warning revealed the fundamental problem at AkzoNobel, which is the end-market demand for sustainable growth. A business can turn the cost knob whatever it wants, but if demand does not ensure sustainable growth, the business will not do much with these cost rationalities.

According to Jefferies, AkzoNobel’s target of EBITDA of EUR 2 billion in 2023 was increasingly out of reach, although the company had not stated that this would be achieved autonomously. Jefferies estimated a 19 percent lower EBITDA than AkzoNobel in last Friday’s analysis, while consensus was 7 percent lower.

What remained intact was AkzoNobel’s ability to pass on the higher costs to customer prices. The moment commodity prices stabilize, it will provide the necessary space for a better margin, Jefferies believes.

The warning

AkzoNobel warned on Wednesday that the operating profit (EBITDA) in the decorative paint segment will be around EUR 50 million lower than previously expected, as the do-it-yourself season in Europe got off to a slow start and corona measures in China weighed on the profit by a further EUR 40 million .. That would mean an EBITDA in the second quarter of approximately 250 million euros, while the market as a whole expected 342 million euros.

In the second half, the company wants to continue to turn that cost knob and optimize working capital.

June was still a pretty good month so far, according to the company from Amsterdam. Quantities in the European market for decorative paints and in China have since improved.

Jefferies immediately wrote Tuesday that this, de facto profit warning, was firmly in place. The bank pointed to the Vara consensus for a quarterly result of 342 million euros and warned that the analyst’s consensus might need to be revised downwards by about a quarter. For the result throughout 2022, this represented a 7 percent risk, according to Jefferies.

Deusche Bank followed after Wednesday. The bank stressed the disappointing second-quarter business deal, but said it did not find the company’s restraint a very big surprise. Deutsche Bank was already 10 percent below the analyst’s consensus with the estimates for EBIT itself.

The next day, ING was listed on the stock exchange. The bank noted that AkzoNobel’s target for adjusted EBITDA for 2023 is still at 2.0 billion euros, a level that ING only sees in 2024, while the consensus for 2023 is tentatively set at 1.9 billion euros. In addition, ING subtly pointed out a difference in the company’s wording, which now looks a little less definite.

In Switzerland, of course, Credit Suisse experts had also looked at the press release and let the company’s comments on it sink in for a while. Estimates for operating profit (EBIT) were cut by an average of 4 percent on Thursday for this year and the next two years. This bank was still 4 percent above analysts’ consensus for 2023, but 8 percent below the 2 billion euros in EBITDA that Akzo itself had in mind. Credit Suisse also sees a reasonable chance that Akzo will reach its own target as long as commodity costs fall and Akzo manages to sustain price increases for its customers.

That was exactly what Jefferies already saw: AkzoNobel’s ability to pass on the higher costs in prices to customers. The company had again indicated on Tuesday that it was on track to negotiate prices in the second quarter that were 14 to 16 percent higher than the market had estimated. The moment commodity prices stabilize, it offers the prospect of margin improvement.

Formulated this way, it all looked a bit mixed: That a company should give a warning about profit formation because European citizens still take it easy with jobs was perhaps a bit of a shock, analysts were in doubt beforehand, given the valuations, and perhaps things will improve again in the second half of the year if the cost of raw materials starts to fall.

The question is whether that will happen. So far, it does not look like that.

Analysts, without exception, lowered their price targets, but left investment advice intact. Jefferies lowered the price target from 84.00 to 77.00 euros, Deutsche Bank from 97.00 to 90.00, ING from 105.00 to 92.00 and Credit Suisse from 105.00 to 93.00 euros.

UBS did not follow the buy recommendation, which is based on assumptions that commodity prices will be more favorable and higher than expected volume in the second half of the year. The bank also saw no reason to adjust the price target of EUR 100.00. If there are no further significant cost reductions and the volume does not deteriorate in the second half of the year, the damage to EBIT will be limited to approximately 7 percent.

At the end of the week, the question may have been raised as to what determined the timing of the press release. After all, according to AkzoNobel, June has actually been a pretty good month so far. Apparently, the ‘pain’ was in April and May, and it was assessed that June would not be able to remedy it.

The AkzoNobel share closed at 67.42 euros on Friday. That equates to a weekly loss of more than 10 percent. However, the AEX also fell almost 7 per cent.

AKZO NOBEL share price is live at € with a difference of † Today’s highest price is € with the low of €

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