It's been a rough ride for Akzo Nobel since it paid £8bn for ICI at the peak of the business cycle in 2008. It may be the world's largest coatings company, but decorative paints have been bad business for the Dutch firm and there are question marks over its strategy. However, a new chief executive with a big reputation starts next month and massive cost savings will drop through this year. Things may be about to change.
- Big cost savings earmarked
- Pricing benefits to come
- New CEO with reputation for change
- High growth markets comprise 40 per cent of sales
- Decorative paints doing badly
- Exposed to European recession
Of course, it won't happen overnight. The ICI deal should have marked a turning point for Akzo. Instead, profit margins have been eroded, the US decorative paints (deco) business is losing money and profits are falling elsewhere in North America and in Europe.
Yes, a grim housing market, down-trading to cheaper brands and rising costs have hurt, but the board's strategy has been called into question. Chasing market share and volumes rather than focusing on profits clearly hasn't worked. A drive into emerging markets also threatens the Dulux brand - 27 per cent of deco sales - while selling cheaply through US retailers such as Wal-Mart is no good for Glidden either.
A series of poor results have saddled Akzo with a reputation for missing targets. Much of the problem lies with deco. The unit made an underlying operating loss of €45m (£37.5m) in the fourth quarter of 2011 despite 6 per cent growth in sales, and an 83 per cent plunge in cash profits left the group total down a fifth at €301m. Raw material costs of €1bn, weaker volumes, low-value product sales and wage inflation meant the group's cash profit margin fell by two percentage points to 11.4 per cent. That's worse than competitors and way short of management's target of 13-15 per cent.
However, good news is on the way. Most raw material costs have stabilised and margins should receive a boost as a wave of price hikes feed through this year. There will be cost savings too - about €200m in 2012 - part of a three-year plan launched in October to save €500m a year by 2014. Almost half of that will come from deco, where a restructuring in Europe and the US is under way.
Deco now makes just 22 per cent of group cash profits. Speciality chemicals and performance coatings generate the lion's share - 46 per cent and 31 per cent respectively. Yes, there's a cyclical element, but personal care products and coatings for food packaging, aerospace and automotive customers are high-margin and resilient.
High exposure to emerging markets should also help. These markets accounted for 40 per cent of Akzo's sales last year and will probably make half the total by 2015, when the company expects $3bn (£1.9bn) in China, €1.5bn in Brazil and €1bn in India. True, growth slowed in the second half of 2011, but the trend is towards greater affluence.
AKZO NOBEL (AKZA) | ||||
|---|---|---|---|---|
| ORD PRICE: | €45.24 | MARKET VALUE: | €10.6bn | |
| TOUCH: | €45.22-45.24 | 12-MONTH HIGH/LOW: | €53.74 | €29.25 |
| DIVIDEND YIELD: | 3.3% | PE RATIO: | 15 | |
| NET ASSET VALUE: | €39.25 | NET DEBT: | 19% | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€m) | Earnings per share (€) | Dividend per share (€) |
|---|---|---|---|---|
| 2008 | 15.4 | -784 | -4.47 | 1.80 |
| 2009 | 13.0 | 471 | 1.09 | 1.35 |
| 2010 | 14.6 | 917 | 2.85 | 1.40 |
| 2011 | 15.7 | 727 | 2.01 | 1.45 |
| 2012* | 16.0 | 970 | 2.96 | 1.50 |
| % change | +2 | +33 | +47 | +3 |
Beta: 1.1 *Societe Generale forecasts (earnings are not comparable with historic figures) £1=€1.20 £1=$1.59 | ||||
And the new chief executive, Ton Büchner, must make it happen. He's not yet in the hot seat, but is already making changes. Rob Frohn, head of speciality chemicals is first out and others may follow. Expectations, of course, are high. Mr Büchner built his reputation turning around underperforming divisions of Swiss engineer Sulzer, dramatically improving sales and margins. He then ran the company for four years and oversaw numerous bolt-on acquisitions. That experience will be invaluable if Akzo is to meet its target of €20bn of sales by 2015.
It shouldn't matter that Mr Büchner's experience is industrial rather than consumer given his hands-on approach and focus on operational efficiency. It certainly doesn't worry formerly bearish analysts at investment bank Societe Generale. Should Europe avoid a deep recession and margins improve dramatically, they reckon Akzo's shares could be worth €65. "A quick fix is unlikely, but signals of change could come through rapidly and, crucially, we do not see a need to be radical to unlock value," they say.
A 'conglomerate discount' currently holds back Akzo's share price, according to SocGen, whose sums reveal the deco division is undervalued by €10 a share on a break-up valuation, and by €4.50 a share on a fair-value basis. The US deco business alone could be worth $500m. Splitting off the coatings and speciality chemicals division, unlikely as it currently seems, would unlock "substantial value".
