Morningstar | AKZA Updated Star Rating from 23 Jan 2019
No-moat AkzoNobel reported adjusted operating income of EUR 243 million in the third quarter, up 8% over 2017 and in line with consensus but slightly ahead of our expectations. Raw material costs remain a headwind. However, Akzo indicated the drag will be less pronounced in the fourth quarter, in line with our prior thinking. Despite challenging market conditions, Akzo improved margins through a 6% increase in prices over the prior-year period. We don’t expect to make a material change to our EUR 82 fair value estimate. At current levels, the shares are fairly valued.We believe AkzoNobel is a margin story--that is, positive stock performance will be highly dependent on closing the margin gap with peers. In that regard, we appreciate that Akzo now appears to be committed to a price-over-volume strategy. In the third quarter, selling prices were up 5% in decorative paints and 7% in performance coatings, while volumes were down 5% and 7%, respectively. Akzo indicated that half of the volume loss was due to “bottom-slicingâ€, meaning the company walked away from potential business that was not profitable. We are pleased to see Akzo cast off this low-margin business to competitors. Further bottom-slicing will likely hurt volumes over the next two quarters, but we remain confident that the vast majority of the business is earning good returns.
We expect cost savings to be the primary driver of results over the next few years. Phase 1 of the fit-for-purpose transformation delivered EUR 35 million of cost savings in the third quarter. Reaching the EUR 110 million target by year-end appears to be in the bag. Phase 2 of the cost-saving program is now starting. Akzo expects to achieve EUR 200 million in cost savings by 2020, and a total of EUR 240 million by 2021.
Akzo Nobel N.V. is a holding company. Through its subsidiaries, Co. is engaged in the production and marketing of paints, coatings and specialty chemicals. Co. has three segments: Decorative Paints, which supplies products for the professional and do-it-yourself markets, including paints, lacquers and varnishes, as well as products for surface preparation; Performance Coatings, which is divided into the following businesses: Automotive and Aerospace Coatings, Industrial Coatings, Marine and Protective Coatings, and Powder Coatings; and Specialty Chemicals, which are used in products such as ice cream, soups, disinfectants, plastics, soaps, detergents, cosmetics, paper and asphalt.
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