On Wednesday, Brenntag AG (ETR:BNRGn) (BNR:GR) (OTC: BNTGY), a global market leader in chemical distribution, saw its stock rating downgraded from Buy to Neutral by Citi. The firm also reduced the price target for Brenntag's shares to €58.00 from the previous €77.00. The downgrade was primarily attributed to the company's failure to meet third-quarter market expectations, as it grappled with rising costs that outpaced the benefits of its cost containment efforts.
Brenntag's recent financial performance has been impacted by increased expenses, notably higher wages and the inflation of transportation, logistics, and energy costs. These factors have led to a situation where the company's cost containment initiatives and gross profit per unit pricing have not been sufficient to offset the growing expenses. Consequently, Citi has also revised its EBITA margin forecasts for Brenntag, lowering them to 7.1% for 2025 from the previous estimate of 7.6%, and to 7.5% for 2026 from 8%.
The chemical distributor is facing challenges in achieving higher-than-expected net cost growth, which is linked to its mergers and acquisitions activities, IT investments, and strategic initiatives. These factors have influenced Citi's decision to downgrade the stock rating. The initial Buy rating was based on the expectation of a complete separation of Brenntag's Essentials and Specialties business units, followed by a potential spin-off.
However, Brenntag's management has decided to delay the separation process. They have determined that Brenntag Specialties is unlikely to close the performance gap with its specialist distributor peers before 2027.
This is partly due to an inferior supplier roster and product portfolio. In light of these developments, the management team is now focusing on operational turnaround and performance improvement before moving forward with any plans for separation or spin-off.
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