Goldman removes Akzo Nobel shares from pan Europe conviction sell list

on Apr 23, 2014

**What happened**

Akzo reported a weak set of 1Q results, 8% below our expectations on a pre-restructuring basis. The disappointment largely came in the Decorative Paint segment, where clean EBIT fell 22% yoy. On the results call management indicated that low volume growth in Deco (+1% vs. our expected +6%) was in part due to share losses in continental Europe and stated that although growth in Asia will likely remain far above levels in DM, it may be a ‘rocky road’. The result in the Specialty Chemicals segment surprised to the upside, in part due to improving demand trends in Europe but also, in our view, due to delivery on cost-cutting efforts.

**Current view**
We cut our EBIT forecasts for 2014/15E by -1%/-5% as we factor in lower Decorative Paints margins, where the transaction effect of weak EM FX is having an unexpectedly large impact. Lower DD&A and a lower corporate line limit the impact at net income. Our EBIT forecasts are 3%/12% below Vara consensus in 2014/15. We revise down our 12-month target price to €49.5 from €50.5, reflecting our lower earnings forecasts (we base our target on 8.0x 2015 EV/EBITDA). On our forecasts, Akzo trades at a 14%/14% premium to peers on 2014/15 EV/EBITDA. Although we still see downside to the shares, we see more limited sector-relative downside and therefore remove the shares from the Conviction List.

Since adding the shares to the Conviction Sell List on August 30, 2013, the stock is up 20.4% vs. the FTSE World Europe’s +11.2%. Outperformance in our view was driven by good delivery of volume growth in 2H 2013, a more favourable view of the de-risking possibilities around the pension liability and more confidence being gained in the cost-cutting programme.
Key risks to our Sell view are: higher than expected operating leverage being delivered in 2014/15, and disposals of parts or all of the Specialty Chemicals business.
[+] source: Goldman Sachs


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