Good momentum into the Q4

Henkel has become more optimistic on the back of strong organic sales momentum for the Consumer Brands in the Q3. In our view, the cut to the lower end of the previous guidance has been made to prevent investors from anticipating negative organic growth in the Q4. The management said that the businesses had had a good start in both divisions for the last quarter of the year. The consensus was met at the top line and organic growth was a +40bp beat.

Strong confidence in the second semester

Henkel’s H1 figures were a mixed bag, beating the consensus at the adjusted profitability line (+3.6%; sales: -1.0%), but missing in terms of the real-world data (-16.2%). The management was very confident about a volume recovery which could be even stronger in the Q4. We see many moving parts governing whether the expected dynamics come through. On the other hand, the comps are becoming less tough and the pricing effects should accelerate.

Consensus-beating start

Henkel had more than a nice start to the year with higher sales prices kicking in. Unexpectedly, newly-created Consumer Brands reported very strong organic growth from inception. The group’s organic growth came from higher prices. All in all, management could not dampen our concerns regarding potential margin pressure, but sales were ahead of our expectations.

Not that bad, but …

... the picture remains unclear. We had factored in some significant costs (€-350m) at the EBITDA level for the this internal merger, which did not fully show up (€-290m mentioned in the presentation; €-49m booked as a one-off). Additionally, we had underestimated the effect from the initial savings (€60m) and a more material impact from higher sales prices and an earlier peak in raw material prices.

Some pain points will travel to 2023

Gaps remain in the Henkel management following the ‘solving’ of the C-level clash by the premature departure of Mr Auris. It looks to be proving difficult to find a suitable successor for the Adhesive Technologies business. This also calls into question the position of the Chairwoman of the Supervisory board, Mrs Bagel-Trah.

Some serious governance issues

The dismissal of Mr Auris suggests that Henkel’s house is on fire and we believe that the Supervisory Board has made the wrong decision. One should see this move within the context of Mr Rohrsted’s early departure in 2016. Henkel now needs someone with watertight credibility as we see Mr Knobel as a bit challenged although we fear his seat is now pretty safe.

Higher guidance might be cautious

Henkel raised once again its FY guidance on the back of a strong Q3, which could be considered as being somewhat conservative. Or maybe management was being prudent about not giving a too aggressive guidance seeing that the global economy is slowing down. We believe management has shared its best view against the background of increasing uncertainties. Reported sales were +3.7% ahead consensus and organic growth was +190bp higher.

A glimpse into the future

Henkel’s Investors Day was meant to give deeper insights into the combined businesses of Consumer Brands and to provide some time-lines. In short, it was a good show, but it was unconvincing to us. There were too many unclear and/or uncertain things. Management made very clear that the combination of Laundry & Home and Beauty Care will be carried out like an external merger. We still have some reservations.

Mixed and flavoured with surprise

Unlike Beiersdorf, Henkel pushed sales prices materially upwards but was not able to fully pass on higher input costs. This was compounded by impairments on exiting Russia and some initial costs for the ‘merger’. Sales were driven materially upwards by higher prices, beating consensus by +2.3%, but real-world-profitability was missed by -21.7% owing in part to merger costs. The management shed little light on this topic.

New issues add to well-known ones

Henkel’s profit warning came out of the blue being explained by the unexpected – higher raw material (direct materials) costs. This was compounded by the negative effects from the decision to exit Russia, which might lead to some impairments in the coming months. Note that Henkel is still planning to merger the struggling Beauty Care business with the more buoyant Laundry & Home Care. Henkel looks to us to be a bit of a mess rather than a well-run company.

How much?

This unanswered, but obvious question, was the elephant in the room in today’s call. As it said it would, management gave further insights about the announced merger. Unfortunately, it failed to say a word about the costs, but indicated that further information will be given when the Q1 statement is released. After the preliminary figures at the end of January, there was not much surprise in the actual ones despite the consensus miss of real-world EBIT (-7.3%; AlphaValue: +0.5%).

Does this acquisition really make sense?

Arguments can be made against any acquisition (too expensive, does not fit well, etc.). Our current thinking is that in this case there are more negatives than there are positives. This might generate some unease in investors.

Something really ‘hairy’

We have abandoned our hope of seeing Henkel’s ‘Mannesmann Moment’. Today’s news seemed as if management had corralled together all the unpleasant things, but added some positives to it. This internal merger is very difficult to understand and raises the question as to why could not this be done by operational measures? The outlook has not made us very enthusiastic for 2022 either, as price increases will fully come to fruitition in 2023. The announced share buy-back programme increases the famil

Strong share price drop on the back of uncertainties

The sales statement did not look too bad and the lower guidance in a background of difficulties on the purchasing side could have been expected. Unfortunately, management did not take the opportunity to convey some positive signals to the market. We understand it has to follow certain rules, but it followed them too rigidly. So everybody came to their own conclusions and now we have to wait until the end of February.

Strong in H1, but business environment weighs negatively on H2

There was not much to criticise about Henkel’s H1 figures as they reflected the expected recovery pattern as well as meeting the street’s expectations. Management did well through a challenging environment with steeply rising freight costs and the tight supply of raw materials. The impact therefrom should be seen in H2. Therefore management has guided for a lower adjusted EBIT margin, mainly due lower margins in Beauty Care and Laundry & Home Care.

Surface Transforms - New guidance – forecasts under review

Surface Transforms has issued new revenue guidance for FY24, with the company now expecting revenues in the range £17.5-22m. We are withdrawing our previous forecasts for FY24 and withdrawing our price target while we review the impact of the new guidance.

Surface Transforms plc (SCE LN) - Forecasts and valuation withdrawn

We note the regulatory announcement this morning from Surface Transforms and withdraw our estimates and valuation, pending conversations with management.

Morning Note – 16 April 2024

Robust margin and cash performance

Surface Transforms (SCE LN) - Obstacles removed for higher production

Surface has issued a brief Q1 update. Production will ramp-up this year as final new equipment is installed, and manufacturing teething problems recede.

Initial Equity Trading Comments - 19 February 2024

Hybridan Small Cap Feast - 16/04/2024

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Dowlais Group - Motoring forward

Dowlais Group’s first set of results were ahead of our expectations, with positive cash generation a highlight despite restructuring and demerger costs. Softer automotive markets will limit margin progress in FY24 towards the double-digit target. Despite this, margins of c 6.5% are still ahead of automotive peers, although the shares trade at a significant discount to our implied generic peer-based valuation.

Morning Note – 9 April 2024

Zeus Top Picks for 2024 - 2023 review and outlook for 2024

On 9 January last year, we set out our ten top stock picks for 2023, for what turned out to be another relatively poor twelve months for UK equities due to two wars, stubbornly high inflation and further tightening of monetary policy. This was even as other major markets, such as the US, largely recovered in the year. In the 2023 calendar year, the AIM All-Share index fell 8.2% and is still 42% off its 2021 high. From the release of our 2023 top picks note, the average total return (assuming div

Morning Note – 4 April 2024

LIBERUM: New Energy Nuggets: Hydrogen - the future is green

Hybridan Small Cap Feast - 17 April 24

17th April 2024 * A corporate client of Hybridan LLP ** Arranged by type of listing and date of announcement *** Alphabetically arranged **** Potential means Intention to Float (ITF) has been announced Dish of the day Admissions: Delistings: What’s baking in the oven? ** Potential**** Initial Public Offerings: Reverse Takeovers: 16 April 2024: Electric Guitar (ELEG.L) Concurrent with its Admission to trading on AIM, Electric Guitar is proposing to acquire the entire issued share capital of 3radi

Gooch & Housego (GHH LN) - A chink of light

Gooch has issued a positive update for H1. Trading has started to recover with stocking levels normalising at industrial and medical devices customers. The outlook is positive with growth returning, and management has confirmed our full year estimates (adjusted for the disposal of EM4). The order book and order flow appear healthy, and net debt is comfortable. Gooch clearly still has plenty to do to lift operating margins from a lacklustre 8.1%, but the transformation plan appears to be back on

Nexteq - FY23 adj EBITDA +4% ahead, FY24E upgrades of +1-10%

Nexteq’s FY23 results show adjusted EBITDA +4% ahead of the +6% upgrade at the January trading update, record FY23 EFCF of $17.4m, and a confident outlook that leads us to reiterate our FY24E revenue and upgrade FY24E gross profit, adj EBITDA, and EFCF by +1-10%. The strategic focus on higher-margin products and customers reducing elevated inventory levels led FY23 group revenue -5% yoy to $114.3m, with Quixant 6% lower at $69.3m and Densitron 2% lower at $45.1m. Effective supply-chain managemen