Nippon Paint reports record sales and operating profits

Nippon Paint's FY24 sales reached JPY1,639bn, exceeding the February 2024 guidance of JPY1,600bn by approximately 2.4%. This 13.6% increase was driven by a 3% volume growth, particularly in the decorative segment, a 5% contribution from favorable FX, and a 3% boost from new consolidations. The company also reported a record high operating profit of JPY188bn, up 11.2%, with operating profit margins of 11.5%. These impressive figures were well-received by the market, with the stock rising 22% since the earnings release.

Founded in 1881 by Komyosha and headquartered in Tokyo, Japan, Nippon Paint is primarily engaged in the manufacture and sale of coating materials, including automotive coatings, industrial coatings, marine coatings, and fine chemical products. Additionally, the company is involved in investment activities, the manufacture and sale of surface treatment agents, and the sale of paints and raw materials. Listed on the Tokyo Stock Exchange since May 1949 and designated to the First Section in October 1961, Nippon Paint has established a significant presence in the specialty chemical industry.

With a workforce of 34,393 employees, Nippon Paint operates through four main business segments: NIPSEA, contributing 55% of FY24 total net sales; DuluxGroup, accounting for 24%; Japan, comprising 13%; and Americas, making up 7%. Over the years, the company has become a key player in the industry, with revenue generation primarily from decorative paints, which contributed 64% of FY24 total net sales. Other segments include automotive coatings at 12%, industrial coatings at 6%, fine chemicals at 1%, other paints at 6%, and other adjacencies business at 11%.

Continued strong performance

Nippon Paint has demonstrated robust performance over the past five years, achieving a revenue CAGR of 18% to reach JPY1,639bn in FY24. This growth was primarily driven by the DuluxGroup segment, which expanded at a remarkable CAGR of 53%, increasing its contribution to the total sales mix from 7% in FY19 to 24% in FY24. Previously known as Oceania, this segment was renamed DuluxGroup following the acquisition of Cromology in May 2022.

EBITDA grew at a slightly lower CAGR of 17% over FY19-24, reaching JPY250bn in FY24. Consequently, margins contracted by 105 bps to 15% in FY24, primarily due to increased material costs. Consistent positive bottom-line performance led to sustained positive FCF over the same period, enabling the cash position to increase by over 1.3x, from JPY123bn at the end of FY19 to JPY288bn at the end of FY24. However, net debt rose from JPY319bn at the end of FY19 to JPY471bn at the end of FY24. Despite this increase, leverage, measured as net debt to EBITDA, improved from 2.8x in FY19 to 2.1x in FY24.

In comparison, Nippon Paint's local peer, Kansai Paint Co., Ltd., also demonstrated revenue growth over the last five years, albeit at a lower rate. Kansai's revenue grew at a CAGR of 6% to JPY562bn in FY24. Nippon Paint's EBITDA margin of 15% outperformed Kansai Paint's 13% in FY24.

Encouraging FY25 guidance

The FY2025 guidance for Nippon Paint excludes earnings and acquisition-related expenses from AOC, with a revision anticipated following a detailed post-closing examination. Revenue is projected to reach a record high of JPY1,740bn, marking a 6.2% increase, driven by market share expansion in existing businesses and the full-year contribution from the consolidation of two Indian businesses, NPI and BNPA.

The decorative market growth is expected to be flat, particularly in developed countries and China TUC, while the China TUB market is anticipated to remain soft. Growth is expected to be maintained through market share gains, price increases, and growth in adjacencies. NIPSEA China's growth is projected to be flat, while automotive production is expected to remain steady.

Operating profit is forecasted to reach a record high of JPY198bn, up 5.4%, driven by revenue growth, expansion in existing businesses, and new consolidations. EPS are expected to be JPY57.05, reflecting a 5.2% y/y increase.

Analysts' favorable outlook

Over the past 12 months, Nippon Paint's stock given modest gains of approximately 2%. However, on a YTD basis, it has achieved a significant 13% increase, driven by strong 2024 results. Similarly, Kansai Paint has shown comparable trends, delivering 3% returns over the last 12 months.

Nippon Paint has mixed rating among analysts, with four out of ten recommending a 'Buy' rating and six suggesting a 'Hold' rating. The average target price of JPY1,219 implies upside potential of 5%. However, analysts' have a positive financial outlook, with anticipated EBITDA CAGR of 10% over FY24-FY26, reaching JPY306bn, with margins of 16% in FY26. In contrast, Kansai Paint is projected to have a lower EBITDA CAGR of 6.5%.

Currently, Nippon Paint is trading at a discount compared to its historical averages. The company is trading at a P/E ratio of 17x, based on the FY25 estimated EPS of JPY64, which is lower than its three-year historical average of 24x. However, it is trading slightly higher than its local peer Kansai Paint at 11x. Similarly, on an EV/EBITDA basis, Nippon Paint is trading at 11x, based on the FY25 estimated EBITDA of JPY280bn, which is lower than its three-year historical average of 15x. Nonetheless, it is trading significantly higher than Kansai Paint at 6x.

Overall, Nippon Paint presents a compelling investment opportunity, underpinned by solid fundamentals and a positive revenue outlook. As a prominent player in the specialty chemical industry, the company is strategically planning to expand into new geographic markets and diversify its product mix. However, several risks must be considered. These include intensifying competition, potential supply chain disruptions, fluctuations in paint demand, and volatile raw material market conditions. Additionally, the company's reliance on third parties for manufacturing and sales, fluctuations in raw material prices, exchange rate volatility, price level risks, and compliance risks pose significant challenges.