We have decided to lower our target price from € 55 to € 40 while sticking to our Accumulate rating on increased worries about the short-term outlook/trends. We have lowered our 3Q11 EBITDA before incidentals forecast from € 539m to € 500m and our FY11 EBITDA before incidentals forecast from € 1,930m to € 1,862m. Below is our view on a few key topics.
Raw materials inflation: at the time of the 2Q11 results release rawmat prices were said to be up roughly 20% y/y.The company hinted at a levelling off of rawmat inflation towards the end of 3Q11 which would mean rawmat costs were probably a few percentage points higher in 3Q11 vs. 2Q11.
Volumes: Based on anecdotal evidence and company feedback we believe the trends witnessed in 2Q11 of softness in mature markets and growth in emerging markets broadly continued, although we expect the overall volume growth in 3Q11 to be slightly below the 2Q11 trend (of +3% y/y).
Pricing: We believe (32,44 EUR, 1,47%) certainly still is in catch up mode with regards to the passing on of higher raw materials prices. We remind that price/mix was +4% y/y in 2Q11 –Given fairly weak volume trends we expect to get a fairly similar to maybe slightly higher price/mix increase in 3Q11 which in view of higher rawmat costs still means soft margins.
Deco Paints –We expect still weak volumes in mature markets with continued downtrading as well –probably some slower growth in emerging markets vs. previous quarters. We have cut our 3Q11 EBITDA forecast from € 183m to € 162m.
Performance Coatings – We expect no major changes from the 2Q trends meaning Wood Coatings & adhesives (going mostly in furniture exports to mature markets) is probably still the weakest from a volume perspective and Powder Coatings still the strongest.
Specialty Chemicals – we expect no more impact from maintenance shutdowns like was the case in 2Q11 (€ 15m). We understood market conditions are softening y/y for ethylene amines while we do not expect major changes in trends from 2Q for the rest of the portfolio.
Cost savings: hinted at the time of the 2Q11 results release to be mulling new cost savings initiatives while indicating it would communicate more extensively on this during the second half. We are not sure whether we will get a precise savings target at the time of the 3Q11 results release but we would expect the new initiatives to be quite sizeable (possibly a few hundreds of millions of € to be realized in a timeframe of a few years).
FY11 guidance given at the time of the 2Q11 results release calls for at least flat EBITDA assuming no further deterioration in economic conditions –we would expect that the political/economic developments in the past weeks/months would qualify for Akzo’s definition of a change in economic conditions. Hence we cut our FY11 EBITDA forecast to well below Akzo’s guidance (FY11 EBITDA now expected at € 1,862m vs. € 1,964m in 2010).
Conclusion: The share is trading at 5.1x EV/REBITDA11E and 4.9x EVREBITDA12E on our significantly reduced forecasts which incorporate significant economic headwinds. Despite the short-term uncertainty and potentially reduced FY11 guidance we stick to our Accumulate for now, while our target price was reduced from € 55 to € 40.