Jefferies Upgrades Azelis and IMCD to 'Buy'
Analysts at Jefferies have upgraded Azelis and IMCD, key players in the specialty chemicals distribution sector, to a "buy" rating. This decision is driven by the expectation of improved market conditions set to enhance organic revenue growth and operational leverage starting in the latter half of 2024.
Factors Influencing the Upgrade
Jefferies identified several key factors for this positive outlook: strategic changes from newly appointed CEOs, favorable market dynamics, and significant opportunities for value-enhancing mergers and acquisitions (M&A). The specialty chemicals sector is showing signs of recovery, with Azelis reporting "green shoots" suggesting an easing in end-market deterioration, potentially leading to organic growth by late 2024.
IMCD, taking a cautious stance, notes limited visibility due to performance fluctuations but acknowledges that easing comparatives could improve future prospects.
Strategic Updates and Leadership Changes
A significant aspect of the upgrade is the anticipated strategy updates from the new CEOs of Azelis and IMCD. Azelis' new CEO, Anna Bertona, will unveil the company's revised strategy in Istanbul. Meanwhile, IMCD's new CEO, Valerie Diele-Braun, will share her vision in Milan. These updates are expected to reinforce the companies' leadership in formulation expertise, supported by asset-light and defensive business models.
Industry Outsourcing Trends and M&A Opportunities
The growing trend of outsourcing within the industry benefits larger firms like Azelis and IMCD. Suppliers increasingly prefer distributors with robust technical and digital competencies, such as formulation labs and data-driven customer interactions. This development gives larger firms an advantage in capturing these opportunities and makes it challenging for smaller competitors to keep pace, opening doors for M&A in a fragmented market.
Azelis and IMCD have aggressively pursued M&A as a growth strategy. Over the past 7.5 years, Azelis completed 52 acquisitions valued at approximately €2.2 billion, generating revenues of €1.8 billion with a Return on Invested Capital (ROIC) of 11.3%. Similarly, IMCD completed 61 acquisitions for €1.6 billion, achieving revenues of €1.8 billion and a ROIC of 12.4%.
Financial Forecasts and Valuation
Jefferies has adjusted its financial projections for Azelis and IMCD, forecasting a revival in organic revenue growth and better operational leverage. For Azelis, the FY24E EBITA estimate is up by 2%, forecasting a 4% recovery in the latter half of 2024 supported by a 2% rise in organic revenue. This adjustment stabilizes FY24E EBITA, with expectations of high-single-digit EBITA growth in subsequent years. The EBITA margin is projected to climb from 11.0% in FY24E to 11.8% by FY28E.
For IMCD, Jefferies raised the FY24E EBITA by 2%, with a projected 10% recovery in 2H24E, also driven by a 2% organic revenue recovery. This leads to a 3% higher FY24E EBITA, with high-single-digit EBITA growth anticipated beyond FY24E. The company's EBITA margin is expected to progress from 11.2% in FY24E to 12.2% by FY28E.
Valuation Gap and Price Targets
Despite the positive outlook, Jefferies notes a valuation gap between Azelis and IMCD. Azelis shares have dropped 14% year-to-date, while IMCD shares decreased by 6%, contrasting with the EuroStoxx index's 10% rise. Azelis trades at 11.9x FY25E EV/EBITA, 30% lower than IMCD, partly due to a share overhang from its 36% private equity owner, EQT, which sold an 11% stake at a discounted market price recently.
Jefferies has increased its price target for Azelis by 26% to €24.0, considering improved EBITA estimates and the elimination of the prior 12.5% share overhang discount. Azelis is now valued at a 25% discount to IMCD. For IMCD, the price target is raised by 21% to €170.0, reflecting higher EBITA estimates and a better M&A premium per share.
