Investing.com -- UBS Global Research has downgraded Brenntag's (ETR:BNRGn) rating to ‘neutral’ from ‘buy,’ citing concerns over the company’s inability to unlock the profit potential that was previously anticipated.
The downgrade, which marks a shift in UBS’s stance since they initiated coverage in December 2022, stems from the company’s disappointing profit performance and uncertainties surrounding its restructuring plans.
UBS analysts note that Brenntag's planned divisional separation, announced in December 2023, was expected to unlock significant value.
However, the analysts now view these plans as unlikely to be fully realized. With both the CEO and CFO set to leave the company within the next 12 months, the ability of Brenntag to execute its plans remains uncertain.
This, combined with the broader pressures faced by the chemical distribution market, has led UBS to reduce its visibility on the company's ability to drive profit growth.
UBS has revised its base case forecasts for Brenntag, cutting them by 8%. The price target has been lowered to €60 from €80.
The analysts also note that while there is a potential upside scenario where the company could reach a valuation of €105 per share if it can improve profitability, there is also a downside risk.
If the restructuring efforts fail again, Brenntag’s stock could see a significant drop, with a downside scenario suggesting a price as low as €35 per share.
Despite these concerns, UBS acknowledges that Brenntag has been struggling in a challenging market environment, particularly in terms of margins. The company has faced a decline in gross profit per unit, which has been a drag on sector margins in FY 2023-24.
However, UBS points out that the main source of margin pressure at Brenntag has been rising selling, general, and administrative expenses per unit, which have increased by more than 40% since 2020.
This has been in contrast to its peers, where SG&A has remained relatively flat. UBS attributes this increase in SG&A to Brenntag’s investment in building capabilities in its Specialties business, but notes that there is still a significant gap in terms of growth, technical capabilities, and portfolio quality compared to competitors like AZE and IMCD (AS:IMCD).
UBS analysts project Brenntag's mid-term EBITA to exceed €1.5 billion, compared to their current FY 2024 forecast of €1.1 billion.
However, this would require adjustments, including reducing excess SG&A costs or accelerating gross profit growth.
UBS suggests that the company’s separation of sales forces and incentives for its Essentials and Specialties businesses, although initially beneficial, may have led to cost duplication and inefficiencies that will need to be addressed by the incoming management team.