Restructuring to drive value and share price; upgrade to Buy
* Restructuring — Akzo is a compelling restructuring story where efforts are similar
to the earlier course of actions but intentions are solid and the focus of management
has shifted from defined cost cutting to continuous improvement. This should not
only help to contain costs and improve margins but should also result in a more
efficient and agile organization, ready to bridge performance gap between Akzo and
its peers. Moreover, this new restructuring plan has taken its course at trough cycle
and despite weaker-than-expected volumes, severe FX volatility that hit sales
disproportionately to raw material costs; the gross profit margin rose 90bp in 2013.
* Re-Rate — Despite Akzo’s share price recent run-up, it has underperformed coating
index by more than 50% in the past two years. In part this reflects weak European
coating market vs. recovery in the US housing industry and part reflects weak
positioning of Akzo Decorative business. However, with its restructuring program
and potential European market recovery, Akzo is set to leverage the volume
improvement to margins. We expect 250bps EBITDA margin improvement by 2015
which should help closing the margin gap vs. its peers and hence re-rate.
* Estimate changes — We raise our 2014 EPS estimate by 8% and medium-term
earnings profile (2016 and beyond) by about 4-5%. This is driven by our view of the
group’s enhanced competitiveness through successful delivery of the restructuring
program. Accordingly, we raise our TP to €65 (from €48), set at about 5% discount
to DCF derived fair value of €70/shr and upgrade Akzo to Buy from Neutral.
* Buy Rating — While macro fundamentals are mixed (forex neg. but GDP trends
positive and raw material costs under control), restructuring is clearly improving
Akzo competitive position. The pension deficit looks under control and the net debt
position has improved although substantially due to asset sales. Trading conditions
seems bottomed out and we believe the long term earnings capacity of the business
is going to benefit from the measures to boost competitiveness, which is the key
focus of management action now. Buy.