EUR 850.00 For Business Accounts Only

Morningstar | Strong Pricing and Margin Improvement for AkzoNobel in 4Q; Shares Fairly Valued

No-moat AkzoNobel reported EBIT of EUR 181 million, broadly in line with consensus but ahead of our expectations. Shares are up 4% intraday, good enough to lead the group, which is interesting given the modest headline numbers. At the segment level, decorative paints EBIT was well below consensus while performance coatings was in line. Indeed, group EBIT would not have met consensus estimates if not for fewer charges in the “other activities/eliminations” segment. We think the market is reacting to the positive developments in pricing and margins, which follows our view that AkzoNobel is very much a margin-story. In the fourth quarter, pricing was up 9% over 2017 with an 8% increase in decorative paints and an 11% rise in performance coatings. As a result, the EBIT margin (before unallocated costs) increased 60 basis points to 9% despite significantly lower volumes, which was in line with our forecast but better than consensus expectations for 8%. The company reiterated its “15 by 20” strategy for guidance which essentially calls for EBIT margins (before unallocated costs) of 15% by the year 2020. After achieving its EUR 110 million cost savings target in 2018, the next phase calls for EUR 200 million in cost saves over 2019-20. While we expect meaningful improvement from the cost-saving program, we continue to believe it will be tough for the company to hit the 15% margin target by 2020, particularly given cyclical headwinds are now accelerating. Consequently, we don’t expect to materially change our EUR 82 fair value estimate. At current levels, the shares look fairly valued.