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Morningstar | Akzo Nobel Company Report

With the specialty chemicals division now sold, AkzoNobel is a pure-play paints and coatings company. The company endured challenging market conditions following the financial crisis as a result of its high exposure to construction- and housing-related markets in Europe. However, economic conditions are now improving and AkzoNobel has had success increasing margins through cost-cutting, although some of the credit goes to a raw material tailwind over 2015-16 with the collapse in the oil price. The company's margins remain well below those of leading U.S.-based peers PPG and Sherwin-Williams. Akzo's new target is a 15% EBIT margin by 2020. While some low-hanging fruit remains for cost-cutting, we think the improvement needed to meet the target is too taxing, given raw material headwinds and a short timeline. We think the performance coatings segment is AkzoNobel’s strongest business, generating 66% of paints and coatings EBIT. End markets are generally cyclical, with transportation being the largest, as the company is a major player in protective coatings for ships, airplanes, and vehicle refinishing. Weakness in marine and oil and gas markets has led to low growth recently, and we don't expect a fast recovery. However, deep customer relationships and performance-priced products lead to high switching costs for the business and ultimately strong returns on invested capital over the cycle. The company is known for its decorative paints, in particular the Dulux brand, but it is difficult to dig a moat based on brand in this business. The segment contributes 34% to paints and coatings EBIT. We think the paint market is highly competitive, with price-sensitive customers. In addition, sales are essentially dependent on a single end market, building and infrastructure. After several challenging years, cyclical winds are finally blowing Akzo's way for the business, which should deliver solid growth over the next one to two years.