AkzoNobel Earnings: In-Line Results and Sequential EBIT Margin Improvement; Shares Cheap

Narrow-moat AkzoNobel AKZA reported third-quarter 2023 adjusted EBITDA of EUR 414 million, broadly in line with the Visible Alpha consensus of EUR 412 million. Management narrowed down the full-year 2023 adjusted EBITDA guidance to a target of EUR 1.45 billion, from a range of EUR 1.4 billion to EUR 1.55 billion previously. This is slightly below the midpoint of the range and the EUR 1.5 billion in our forecast, but we expect the short-term negative impact to be largely offset by a time value of money adjustment in our model. We confirm our EUR 88 fair value estimate. The market reacted negatively to what can be interpreted as a guidance downgrade, sending shares around 4% lower during the day and making the discount to our fair value even more attractive, at around 35%.

Price and mix contributed 3% to revenue growth in the quarter (compared with 6% in the first half), while volume growth was flat for both reporting segments. The company continued to see some volume recovery in marine and protective coatings and powder coatings, offset by continued weakness in industrial coatings. The EBIT margin continued to improve sequentially as AkzoNobel realized further benefits from raw material price deflation (adjusted EBIT margin of 11.8% in the third quarter compared with 11.3% in the second quarter).

Management also announced an industrial transformation program meant to drive operational efficiencies across both segments. It’s expected to deliver a EUR 250 million annual cost benefit by the end of 2027, with the bulk of the amount expected to be realized in 2027. It should entail an additional capital expenditure of EUR 150 million over the next three years. This program has been hinted at by the new CEO in previous quarters, and we have reflected it in our forecast through consistent margin improvement over the midterm toward midteens levels, ahead of historical levels. Therefore, we don’t expect to increase our midterm margin forecast until more details are available.