AkzoNobel: Brand Power of Dulux Is Shining Through Despite Challenging Market Environment

We reduce our fair value estimate for AkzoNobel AKZA by 12% to EUR 88 following a transfer of coverage and a fresh look at the business, including a slightly more moderate long-term outlook. We believe shares remain attractive even after this fair value cut, offering an upside of around 20% at current levels.

We confirm our narrow moat rating for AkzoNobel. Apart from switching costs in the performance coatings segment, we now believe the moat is also supported by intangible assets in the decorative paints segment. We think the significant underlying improvement in profitability for the segment starting with 2018, as well as the company’s recent success in passing through the raw material cost inflation through pricing have showcased the brand power present in decorative paints. Dulux (or the family of brands) holds the number one or two market position in 70% of markets in which it operates, enjoying brand loyalty from both do-it-yourself consumers and professional painters.

We expect top-line growth will be relatively muted over the next two years to 2025, with price and mix likely to turn negative after two years of significant contribution to growth. Almost 50% of the portfolio can be considered indexed to a commodity basket either due to the concentrated buying power in some end markets, or due to outright indexing in contracts. For this reason, if the raw material deflation seen in the second quarter of 2023 is to continue, we expect AkzoNobel will struggle to hold on to the entirety of price increases. Still, on the whole, the benefits from raw material price deflation should outweigh the downward pressure of limited negative pricing and should support a normalization in operating margin. This is already underway this year. Additional supply chain and portfolio optimization measures hinted at by management should deliver further EBIT margin improvement towards midteens levels over the midterm.