Jefferies Upgrades Azelis and IMCD with Positive Market Outlook
Jefferies Upgrades Azelis and IMCD: A Positive Shift
Analysts at Jefferies have initiated a significant upgrade for Azelis (EBR: AZE) and IMCD (AS: IMCD), two key players in the specialty chemicals distribution sector, elevating their ratings to 'buy'. This change is rooted in the anticipation of enhanced market conditions that could foster a recovery in organic revenue growth and operational leverage starting in the latter part of 2024.
Key Drivers Behind the Upgrade
Several factors have been identified by Jefferies as pivotal to this optimistic forecast. Notably, both companies have recently appointed new CEOs who are expected to bring fresh strategic directions to their respective firms. Additionally, improvements in market dynamics and potential for beneficial mergers and acquisitions further support this favorable outlook.
Market Dynamics and Company Strategies
Recent developments in the specialty chemicals industry hint at a potential recovery. Analysts noted that upstream product spreads have slightly increased from two-decade lows during the traditionally slow month of August. Azelis has reported early signs of resurgence, with indications that market deterioration is easing, paving the way for a return to organic growth in the second half of 2024.
On the other hand, IMCD has adopted a more cautious stance, reflecting a lack of clear visibility due to variable performance. However, the company has recognized that less stringent comparisons in the future could bolster its performance outlook.
The Role of Leadership in Strategic Growth
Jefferies attributes part of this upgrade to expected strategic updates from the new CEOs of both Azelis and IMCD. For instance, Azelis' newly appointed CEO, Anna Bertona, is preparing to unveil an updated company strategy in Istanbul, while IMCD's Valerie Diele-Braun is set to share her vision in Milan. These moves could fortify their standings in formulation expertise, leveraging their asset-light and resilient business models.
Industry Trends Favoring Larger Distributors
This industry upgrade aligns with an overarching trend of increased outsourcing, which is advantageous for larger distributors like Azelis and IMCD. Suppliers are increasingly favoring distributors equipped with robust technical and digital capabilities, including formulation labs and advanced customer interaction technologies. This trend poses challenges for smaller competitors, making it a ripe environment for mergers and acquisitions, as smaller players find it difficult to compete.
Growth Strategies Focused on Mergers and Acquisitions
Both companies have aggressively pursued add-on acquisitions. Azelis, for example, has undertaken 52 acquisitions over the past 7.5 years, valued at approximately €2.2 billion, generating revenues of around €1.8 billion. This has enabled the company to achieve an incremental Return on Invested Capital (ROIC) of 11.3%.
IMCD has similarly completed 61 acquisitions for about €1.6 billion, resulting in corresponding revenues and an even higher incremental ROIC of 12.4%. Jefferies believes both companies are well-positioned to capitalize on continued consolidation opportunities in the specialty chemicals space.
Financial Forecasts and Future Expectations
Following their assessment, Jefferies has revised its financial forecasts for Azelis and IMCD, expecting robust organic revenue growth and enhanced operational capabilities. Analysts project a modest 2% increase in FY24E EBITA for Azelis, with expectations of a 4% recovery in the latter half of 2024, facilitated by a similar increase in organic revenue.
For IMCD, a 10% recovery is expected in the second half of FY24, with a 2% organic revenue recovery also anticipated. Consequently, this leads to a projected increase in FY24E EBITA by 2% for IMCD, as well.
Valuation Insights and Market Responses
Despite the optimistic prospects, Jefferies has pointed out a valuation discrepancy between the two firms. Since the start of the year, Azelis' shares have experienced a decline of 14%, while IMCD's shares have decreased by 6%. In comparison, the EuroStoxx index has increased by 10%, highlighting a concerning gap.
Current estimates suggest that Azelis is trading at 11.9x FY25E EV/EBITA, representing a 30% discount compared to IMCD. This difference has been attributed in part to the recent sale of an 11% stake by Azelis' 36% private equity owner, EQT, at a significant discount to market prices.
In response to these evaluations, Jefferies has adjusted its price target for Azelis upwards by 26% to €24.00, reflecting enhanced EBITA estimates and adjustments for share overhang. For IMCD, the price target has been raised by 21% to €170.00, mirroring the increased EBITA figures and market premiums.
Frequently Asked Questions
What are the main factors for the upgrade of Azelis and IMCD?
The upgrade is primarily due to anticipated better market conditions, new leadership strategies, and potential for value-enhancing mergers and acquisitions.
How have the new CEOs influenced the outlook?
The new CEOs are expected to bring fresh strategies that could strengthen their companies' market positions and adapt to industry dynamics.
What growth strategies are Azelis and IMCD employing?
Both companies are aggressively pursuing mergers and acquisitions to enhance their market presence and operational capabilities.
What is the projected recovery in financial performance for these companies?
Analysts expect a rebound in organic revenue growth, with Azelis targeting a 4% recovery in the latter half of 2024 and IMCD forecasting a 10% recovery in the same period.
What is the current market perception of Azelis compared to IMCD?
Azelis is currently trading at a lower valuation than IMCD, which has raised concerns about the valuation gap despite similar growth strategies.
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