Morningstar | Akzo Continues to Improve but Below Market Expectations in First Quarter; Shares Fairly Valued
AkzoNobel shares are trading down 4% intraday after reporting first-quarter results. EBIT was up 9% over 2018 but consensus was calling for a 22% jump. We did not have such ambitious expectations for the first quarter given still-high raw material costs and a softer global economic environment. With prices up 6%, 40 basis points added to the EBIT margin, and EUR 38 million in cost savings delivered in the quarter, we are satisfied with progress. Consequently, we don’t expect to make a material change to our EUR 82 fair value estimate. At current levels, the shares look fairly valued.Volumes were down 7% in the quarter, with roughly equal declines reported in both decorative paints and performance coatings. Analysts on the conference call took notice. We are not overly concerned here as we still believe the key to increasing shareholder value at AkzoNobel is margin improvement. As a result, we continue to cheer the company’s aggressive price increases and demarketing of lower-value business. In addition to volume declines from the company’s value over volume strategy, China was a drag--particularly in decorative paints--and auto-related business was also down. Volumes in vehicle refinishes were hit by pre-buying in the fourth quarter. We expect this business to recover throughout the remainder of the year.
Raw material inflation continued in the first quarter, although at a lower rate than 2018, and is expected to creep into the second quarter. We expect raw material pressure to ease in the second half given the weaker global economy and think more serious relief could be in the cards in 2020 if the oil market moves back into an oversupply situation.
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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