Efficiency Initiatives And South Asia Focus Will Strengthen Future Market Position

Key Takeaways

• Efficiency programs and workforce reductions are set to bolster net margins through significant cost savings.
  
• Strategic market actions in South Asia and growth in Coatings may enhance future revenue and market share.
  
• Mixed market conditions, high working capital, and weak demand in China challenge Akzo Nobel's revenue growth, financial health, and operational performance.

Catalysts

Engages in the production and sale of paints and coatings worldwide.

• Akzo Nobel is implementing an industrial efficiency program that includes the closure of multiple sites, expected to result in significant cost savings and increase net margins.
  
• The company announced a program to cut 2,000 SG&A positions, anticipated to deliver annualized savings, potentially boosting net margins.
  
• Akzo Nobel is conducting a strategic review in South Asia, particularly focusing on India, aiming to participate in market consolidation, which could increase market share and drive future revenue growth.
  
• The company is experiencing growth in Coatings, particularly Powder Coatings and Marine & Protective, which can positively impact future revenues despite weaker performance in the automotive sector.
  
• Akzo Nobel is focusing on strategic capital allocation and potential share buybacks, which could improve earnings per share in the future.

Akzo Nobel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Akzo Nobel's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 6.9% in 3 years time.
• Analysts expect earnings to reach €808.8 million (and earnings per share of €4.79) by about December 2027, up from €565.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €919.1 million in earnings, and the most bearish expecting €654.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2027 earnings, up from 18.2x today. This future PE is lower than the current PE for the GB Chemicals industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

Akzo Nobel Future Earnings Per Share Growth

Risks

• Mixed market conditions and temporary elevated working capital have increased Akzo Nobel's net debt-to-EBITDA ratio, which may impact their ability to finance operations or invest in growth initiatives, affecting overall financial health.
  
• Flat price mix and negative regional mix could lead to constraints on revenue growth, especially when combined with higher-than-expected adverse currency impacts, which might affect earnings.
  
• Weak demand in China, particularly in the decorative paints business due to a challenging real estate market and low consumer confidence, presents ongoing risks to revenues and margins and a delayed rebound could extend these challenges.
  
• The restructuring and strategic portfolio review initiatives, while aiming for cost efficiencies, could lead to execution risks, potential disruptions, and initial costs that may affect net margins and EBITDA if not managed effectively.
  
• Rising labor costs and staff reductions might strain the company's operations and employee morale, potentially impacting productivity and long-term operational performance, which could affect net earnings and margins.

Valuation

• The analysts have a consensus price target of €73.53 for Akzo Nobel based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €90.0, and the most bearish reporting a price target of just €58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €11.7 billion, earnings will come to €808.8 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 6.1%.
• Given the current share price of €60.3, the analyst's price target of €73.53 is 18.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.