Investing.com -- Analysts at Jefferies in a note dated Monday have upgraded Azelis (EBR:AZE) and IMCD (AS:IMCD), two companies in the specialty chemicals distribution sector, to a “buy" rating.
The upgrade is based on expectations of better market conditions, which are likely to drive a recovery in organic revenue growth and improve operational leverage beginning in the second half of 2024.
Jefferies analysts flag several key factors for this positive outlook, including strategy updates from newly appointed CEOs, improving market dynamics, and substantial opportunities for value-enhancing mergers and acquisitions.
Jefferies flag that recent developments in the specialty chemicals sector signal a potential turnaround.
“Upstream product spreads have inched up from 20 year lows throughout the seasonally quiet August period,” the analyst said.
Azelis, one of the distributors in this space, has also indicated that "green shoots" are emerging, suggesting an easing in end-market deterioration. This trend is expected to result in a return to organic growth for Azelis in the second half of 2024.
IMCD , another major player in the sector, has taken a more cautious approach, pointing to limited visibility due to fluctuations in monthly performance. However, the company acknowledged that easing comparatives could lead to a more favorable outlook ahead.
A key reason for Jefferies' upgrade is the expected strategy updates from the new CEOs of Azelis and IMCD.
Azelis' new CEO, Anna Bertona, is set to present the company's revised strategy in Istanbul on September 17th, while IMCD's new CEO, Valerie Diele-Braun, will share her vision in Milan on September 24th.
These updates are likely to strengthen both companies' positions as leaders in formulation expertise, supported by asset-light and defensive business models.
Jefferies analysts flag that the growing trend of outsourcing in the industry is advantageous for companies like Azelis and IMCD.
Suppliers are increasingly looking for distributors with strong technical and digital capabilities—such as formulation labs, virtual application facilities, and sophisticated data-driven customer interactions—positioning larger firms to seize these opportunities. This shift is making it harder for smaller competitors to keep up, opening the door for value-enhancing M&A in a fragmented market.
A key component of the growth strategy for both Azelis and IMCD has been their aggressive pursuit of M&A. “Azelis made 52 acquisitions over the last 7.5 years for an estimated €2.2bn, with revenues of €1.8bn (1.2x revenues), resulting in an incremental ROIC of 11.3%,” the analysts said.
Similarly, IMCD has made 61 acquisitions for €1.6 billion, also generating revenues of €1.8 billion (0.9x revenues), with an incremental ROIC of 12.4%.
Jefferies believes that both companies are well-positioned to continue this trend, benefiting from consolidation opportunities in the sector as smaller players struggle to compete.
Jefferies has revised its financial forecasts for both Azelis and IMCD, anticipating a rebound in organic revenue growth and improved operational leverage.
For Azelis, analysts have raised the FY24E EBITA estimate by 2%, projecting a 4% recovery in the second half of 2024, supported by a 2% recovery in organic revenue.
This adjustment leads to stable EBITA for FY24E, with expectations of high-single-digit EBITA growth in the years following. The EBITA margin is anticipated to increase from 11.0% in FY24E to 11.8% by FY28E.
For IMCD, Jefferies has raised the company's FY24E EBITA by 2%, with a more optimistic 10% recovery in 2H24E, also driven by a 2% organic revenue recovery.
This adjustment leads to a 3% higher FY24E EBITA. Beyond FY24E, IMCD is expected to achieve high-single-digit EBITA growth, with its EBITA margin projected to improve from 11.2% in FY24E to 12.2% by FY28E.
Despite the optimistic outlook, Jefferies flags a valuation gap between Azelis and IMCD. Year-to-date, Azelis shares have fallen by 14%, whereas IMCD shares have decreased by 6%, while the EuroStoxx index has risen by 10%.
Azelis is currently trading at 11.9x FY25E EV/EBITA, which is 30% lower than IMCD. This valuation gap is partly due to the share overhang from Azelis' 36% private equity owner, EQT (ST:EQTAB), which recently sold an 11% stake at an 11% discount to the market price.
Jefferies has raised its price target for Azelis by 26% to €24.0, taking into account the improved EBITA estimates and the removal of the previous 12.5% share overhang discount.
Azelis is now valued at a 25% discount to IMCD. For IMCD, Jefferies has increased its price target by 21% to €170.0, reflecting higher EBITA estimates and a higher M&A premium per share.