Jefferies Upgrades Azelis and IMCD to Buy

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.

Reasons for Upgrade

The upgrade is based on expectations of better market conditions, likely leading to a recovery in organic revenue growth and improved operational leverage beginning in the second half of 2024.

Jefferies analysts highlight several key factors for this positive outlook:
– Strategy updates from newly appointed CEOs.
– Improving market dynamics.
– Substantial opportunities for value-enhancing mergers and acquisitions.

Recent developments in the specialty chemicals sector signal a potential turnaround. According to the analyst, “Upstream product spreads have inched up from 20-year lows throughout the seasonally quiet August period.”

Azelis

Azelis, one of the distributors in this space, has 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

IMCD has taken a more cautious approach, citing limited visibility due to fluctuations in monthly performance. However, the company acknowledges that easing comparatives could lead to a more favorable outlook ahead.

Strategic Updates

A key reason for Jefferies’ upgrade is the upcoming 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 expected to strengthen both companies’ positions as leaders in formulation expertise, supported by asset-light and defensive business models.

Jefferies analysts emphasize that the growing trend of outsourcing in the industry benefits companies like Azelis and IMCD. Suppliers are increasingly seeking 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.

Mergers and Acquisitions (M&A)

A significant component of Azelis and IMCD’s growth strategy is their aggressive pursuit of M&A. Jefferies notes:
– Azelis made 52 acquisitions over the last 7.5 years for an estimated €2.2bn, generating revenues of €1.8bn.
– IMCD has made 61 acquisitions for €1.6 billion, also generating revenues of €1.8 billion.

Both companies are well-positioned to capitalize on consolidation opportunities in the sector, especially as smaller players struggle.

Financial Forecasts

Jefferies has revised its financial forecasts for both Azelis and IMCD, anticipating a rebound in organic revenue growth and improved operational leverage:
– For Azelis, the FY24E EBITA estimate has been raised by 2%, with a projected 4% recovery in the second half of 2024 supported by 2% recovery in organic revenue.
– For IMCD, the FY24E EBITA has also been raised by 2%, with a more optimistic 10% recovery in 2H24, driven again by a 2% organic revenue recovery.

Valuation Gap

Despite the optimistic outlook, there exists a valuation gap between Azelis and IMCD. Year-to-date, Azelis shares have fallen by 14%, while IMCD shares have decreased by 6%, against a 10% rise in the EuroStoxx index.

Azelis is currently trading at 11.9x FY25E EV/EBITA, which is 30% lower than IMCD, partly due to a share overhang from Azelis’ 36% private equity owner, EQT. Jefferies has raised its price target for Azelis by 26% to €24.0 and for IMCD by 21% to €170.0, reflecting higher EBITA estimates and an increased M&A premium per share.