Industrial Transformation Program Will Deliver €300 Million Benefits By 2027

Key Takeaways

• AkzoNobel's transformation and efficiency initiatives are expected to enhance margins, operational efficiency, and long-term earnings.
  
• Strategic price increases and focus on growth markets aim to maintain revenue stability and support EBITDA improvements.
  
• Weak demand in key segments, high restructuring costs, and macro risks could pressure Akzo Nobel's growth, financial flexibility, and profitability.

Catalysts

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

• AkzoNobel's industrial transformation program is projected to deliver €300 million in benefits by 2027, primarily impacting cost savings and efficiency gains. This should enhance EBITDA margins and overall earnings in the long-term.
  
• The SG&A efficiency targets are expected to generate over €150 million in gross savings, with significant benefits materializing in 2025. This will improve net margins by reducing operational expenditure.
  
• Efforts to optimize the network through site closures and strategic investments are anticipated to increase asset utilization and efficiency, thereby positively affecting operating margins and earnings.
  
• AkzoNobel is implementing price increases to offset anticipated low single-digit raw material and freight inflation, which should help maintain or improve net margins and revenue stability.
  
• Volume growth is forecasted in Marine, Powder, and Emerging Deco markets, driven by differentiated technology and services, potentially contributing to revenue growth and improved EBITDA.

Akzo Nobel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Akzo Nobel's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 7.3% in 3 years time.
• Analysts expect earnings to reach €841.0 million (and earnings per share of €5.01) by about January 2028, up from €565.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €636.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 17.2x today. This future PE is greater than the current PE for the GB Chemicals industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.18%, as per the Simply Wall St company report.

Akzo Nobel Future Earnings Per Share Growth

Risks

• The weak demand in the automotive segment and automotive refinishes could continue, potentially hampering revenue growth in these areas.
  
• The company is experiencing weakness in the China Deco market due to a stalled real estate market and low consumer confidence, potentially impacting revenue and gross margins.
  
• Increasing leverage, as indicated by an elevated net debt-to-EBITDA ratio exceeding their target, could pressure net margins and financial flexibility.
  
• Restructuring costs are expected to stay high in 2025, further straining cash flow and net profits, limiting financial resources.
  
• Macro risks, including currency volatility and raw material inflation, remain potential headwinds that could affect earnings reliability and net margins.

Valuation

• The analysts have a consensus price target of €72.05 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 €57.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €11.6 billion, earnings will come to €841.0 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of €56.92, the analyst's price target of €72.05 is 21.0% 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.