Akzo’s planned not-so-obvious metamorphosis

Akzo has announced its ‘Industrial Transformation’ plan, which will be a rather lengthy and expensive exercise. This comes nearly twelve months after Mr Poux-Guillaume took the helm. His predecessor had tried to implement the Growth & Deliver plan as well as the upgrade to the Focus2 strategy to meet the €2.0bn adjusted EBITDA target. Akzo’s Q3 figures were in line with expectations (sales: -0.9%; adjusted EBIT: +0.6%).

A changing equity story

Akzo’s equity story is mow changing from higher sales prices to raw material price deflation. The coming quarters will see some weaker pricing initiatives and margins will be protected by raw material price deflation. The management’s guidance is for a Q3 which should look slightly better than the reported Q2 with less of a pricing impact, more raw material deflation and flat volumes for the year. The Q2 figures were a mixed bag being below consensus at many levels.

Q2 profitability might be somewhat watered

Akzo reported consensus-beating Q1 figures, giving greater confidence for the remainder of the year, despite flagging some sensitivity to the macro-economic environment. Q2 is seen to be quite a strong quarter based on the assumption that May and June have less rain after a wet April. Management guides for an adjusted EBIT of around €300m in the quarter. When it comes to the price of raw materials, management highlighted that a continuation of lower prices is not a given.

Still too early to become a bull case?

We believe it is still too early for Akzo to become a bull case. In today’s call, it became quite clear that the new CEO is seeing investors’ confidence rising. It also came clear to us that management is not overmodest as there are many moving parts in the given guidance. Reading between the lines, it is obvious that there is still much work to do, even for the CEO, as his predecessor did not really deliver what he had announced.

Ticking off a disastrous 2022 …

… and fingers crossed for a better 2023. Akzo had a difficult Q4 22 and the challenges will continue in Q1 23. The company expects a recovery in profitability in 2023.

At the turning point

Customers have decided to put down their brushes and paint rollers. After some first indications in Q2, this trend has accelerated in Q3. This has increased the availability of cheaper raw materials, thereby impairing the company’s profitability, which is also being negatively impacted by higher idle costs. The first positive effects from lower raw materials are expected in H1 2023. These negative developments have forced the management to cancel its 2023 targets. New targets may be announced

Are the 2023 targets still in reach?

It is probably anecdotal, but Akzo had difficulty in conducting its planned webinar. On the other hand this fits with the potential internal challenges, which will have to be countered with via another programme, this time not purely focused on cost cutting. Akzo’s Q2 was a mixed bag, beating our estimates by +14.6% (consensus: +4.5%) on the top line while the adjusted EBITDA fell short by -1.8% relative to our estimates (consensus: -5.2%). The EBIT miss was even greater (Alphavalue: -17.8%; co

Higher prices outstrip input costs

The effect from the higher sales prices came as no surprise but was stronger than anticipated. The management remains optimistic that it can implement another round of price increases to stay ahead of the cost curve. We fully understand the company’s ambition of avoiding significant margin compression, but we are concerned that this might come at the expense of lower volumes. Currently the business is being held back by all manner of issues along the value chain. Therefore, we remain cautious.

The miracle will be explained a bit later on

Akzo’s ambition to deliver +50bp on average annually over 2021-23 will be explained on 17/02/22, but the Q4 21 figures were solid and look like quite a good basis for getting there. The company slightly beat consensus (sales: +0.9%; adjusted EBITDA: +0.8%). Our cautious estimates were beaten more meaningfully (sales: +8.3%; adjusted EBITDA: +6.7%) as we thought the businesses would suffer more from the mix of supply constraints and higher raw material prices. The company plans to accelerate pric

Sharply rising costs materialise

Akzo’s Q3 figures were above our quite cautious expectations, but could not match with the street. The top line was +2.6% (consensus: -1.1%) and profitability +3.2% (consensus: -1.8%) above our estimates. The implemented higher sales pushed the top line, but raw material prices were higher than guided. Decorative Paints showed some price sensitivity. Management flagged higher raw material prices as well as higher sales prices. We believe this will also have a negative volume impact, when it com

A weakish outlook

Akzo reported the expected strong volume-driven recovery yoy with some positive contributions from one-offs to profitability. Our conservative estimate was beaten primarily due to a less pronounced impact from higher raw material prices and the positive one-off. Consensus was not fully matched (top line: +3.3%; adjusted EBITDA: -3.5%). The company guides for ‘significant higher’ raw material prices, which leaves us on the cautious side.

All hands on paint

Akzo had a very strong start to the year, clearly beating our expectations as well as consensus (top line by +6.6%; adjusted EBITDA: +8.0%) and predominately driven by the strong recovery of Paints, whereas Coatings reported a moderate performance. Despite the strong volume-driven start, Akzo’s long-term weakness came even clearer: the lack of pricing power. The price/mix effect was still negative and, against the background of recent developments on the raw material side, the negative sign will

A stronger than expected ending to the year

The extraordinary profitability push in Q4 could have made us believe that FY20 was exceptional as we haven’t seen such an organic growth rate of +3% for a long time. Looking at the long-term opportunities, missed chances (e.g. Tikkurila) and the sustainability of its profitability, our thinking becomes not so optimistic. Lower raw material prices will be of some help in 2021 but, thereafter, growing in line with the markets will not be good enough, when a rival enters one’s backyard.

In for a penny, ...

... in for a pound. Having thrown its hat into the ring, Akzo submitted today a binding proposal to Tikkurila’s management with unchanged conditions. It looks to us that Akzo has gathered enough information to take the next step, which is – as usual – linked to certain conditions, still underpinning the aim to take over the Finnish paints company.

Buying into some organic growth

Rephrasing our headline, it could have been ‘Buying into something tiny’. We are still struggling with the financial offer (€1,378m) and potential bidding war (management had excluded this), with its long-term rival PPG. We understand the strategic rationale, but a 3-5 year period to full value creation is completely unacceptable in our view. Furthermore, Akzo’s balance sheet will suffer due to the financing of the potential acquisition, which might postpone our rating upgrade.

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