Tuesday 12 December 2017

Paint-maker stock is a bright prospect

AKZO impresses with its dynamic nature
AKZO impresses with its dynamic nature

I have to admit that I am not a DIY man. If I suggested painting the house, many anxious voices would immediately urge me to reconsider. But for some reason the paint brand, Dulux sticks in my mind. This may be because it was once the sponsor of Shelbourne Football Club but as a St Pat's supporter it guaranteed that I would never dip a brush in a pot of Dulux paint.

And I do remember it was one of the brands of Imperial Chemical Industries (ICI), which in the 1950s and 1960s was the biggest and most powerful corporation in the UK. Since 2008, Dulux has been owned by the Dutch company AKZO Nobel, a European giant that has more offshoots than a modest-sized rain forest.

AKZO has roots back in the 17th Century, but its present incarnation stems from 1984 when it merged with Nobel Industries.

The latter company started life as a Swedish arms company and at one time was majority-owned by Alfred Nobel, inventor of dynamite, whose legacy is also the Nobel Prize.

When consolidation was the rage in Continental Europe in the 1960s AKZO was in on the act, linking up German and Dutch paint producers. In the last quarter century, AKZO restructured its business into pharma, coating and chemical divisions. By the beginning of the millennium, its pharma business was the fastest growing in Europe, accounting for almost half of AKZO profits. Surprisingly, the Dutch company sold it to Schering-Plough in 2007.

Today, AKZO Nobel is the largest producer of paint and coating in the world and a major company in specialty chemicals. Based in Amsterdam, it has operations in 80 countries, employing 55,000 people with well-known brands like Dulux, Cuprinol and Hammerite.

The company is structured around three business divisions; specialty chemicals, performance coatings and decorative paints. The specialty chemical division is a global leader, employing 11,000 people worldwide and contributes €5bn to group revenue. It has a portfolio of 2,000 products and some items are used by producers making products from soup to soap, plastics to pulp and ice cream to asphalt. Sales to Europe/Middle East/Africa (EMEA) regions generate almost half of the revenue for specialty chemicals, followed by the Americas and Asia with a quarter each. In 2012, economic conditions worldwide were difficult, the construction industry slow but the division had a solid year.

The performance coating business is the leading global supplier, having revenue of €4.7bn and employing 21,000 people. It supplies products to the construction, consumer electronics, ships and yachts sectors. It also supplies protective coating for major landmarks, such as London Eye, Sydney Harbour Bridge and the Peking Aquatic Centre.

The shift of industrial production from Europe to Asia is shown by the fact that Asia generates half of the performance coating revenue, with Americas and EMEA accounting for the remainder equally. The division recorded record profits in 2012 due mainly to currencies and an acquisition. The scope of this business is shown by the range of customers like IKEA, Dell, VW, Boeing and Toyota to name a few.

AKZO is the biggest supplier in the world of decorative paints for the protection of residential and commercial buildings, its main brand being Dulux. This division has revenues of €5bn and employs 22,000 with a product range of not just interior and exterior paints but lacquers and varnishes. Half of the revenue is generated in Europe followed by the Americas and Asia.

The market for paints in 2012 was flat, with the exception of China; conditions were described as challenging and it divested its North American paint operation, selling it to US company PPG.

The company has a market value of €11bn but the economic environment remains challenging. In spite of this, the company revenue was €15bn, up 5pc due to favourable currencies and pricing.

EBITDA was positive at €1.9bn but the company showed a net loss due to an impairment charge of €2bn. There is some concern that for AKZO the trading climate is deteriorating. Latest figures show a small decline in sales, with paint and coating down 1pc but specialty chemicals having a 12pc drop in demand. As a result, the share is €44 down from its high of €58.

To an investor, the one thing about AKZO that impresses is the dynamic nature of the group. There's always another deal waiting to be unfurled.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares.

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