Henkel: Guidance Narrowed at the Top End on Sequential Volume Improvement and Higher Cost Savings

Narrow-moat Henkel HEN reported sequential volume improvement and hinted at continued profit margin recovery in its third-quarter trading update. The integration of the beauty care and laundry and home care business units into one consumer brands unit is progressing ahead of plan, with 80% of the targeted first phase net savings of around EUR 250 million expected to be achieved this year. These are primarily personnel-related savings as Henkel implements a leaner organizational setup. Given the positive developments in the quarter, the full-year guidance was narrowed at the higher end for both organic sales growth and adjusted EBIT margin. Organic sales growth is expected to end the year between 3.5% to 4.5% (from 2.5% to 4.5% previously), while the adjusted EBIT margin is expected to fall between 11.5% and 12.5% from a range of 11% to 12.5% previously. Given the higher savings expected this year, we have increased our 2023 adjusted EBIT margin forecast to 12% from 11% previously. Still, negative currency effects and the impact of the sale of the business in Russia weigh on the top line and more than offset the benefit of the higher expected organic sales growth, leaving our 2023 nominal sales forecast 3.4% lower compared to 2022. With this, our fair value estimate remains unchanged at EUR 82 per share. Shares were up around 3% in intraday trading but continue to be undervalued.

The volume picture improved across both business units, but more materially in the consumer brands unit. Here volumes were down by 5.7% in the third quarter compared with 10.9% in the second quarter. A lot of the decline in the third quarter can still be attributed to trade negotiations and portfolio measures, with pure volume decline of around negative 1.7%. This marks a considerable improvement given the significant pricing implemented over the last two years. Management expects volume growth excluding portfolio measures to be around flat in the fourth quarter.