Event in Progress:
View the latest research on other companies in the sector.
Novozymes reported estimate-beating Q3 23 numbers, underpinned by continuing momentum in BioEnergy as well as a strong recovery in the key consumer-facing businesses. The weakness in the textile and grain processing segments and still persistent destocking headwinds across multiple business areas remain the swing factors with respect to the FY23 outlook. We do not expect significant revisions to our estimates.
Novozymes Novonesis A/S (Novozymes A/S) Class B
Summary of Q323 results Q3 organic growth came in at +8% (of which 3% volume, 5% price) and ahead of consensus of +5.8%. The topline beat was led by Bioenergy although Household Care was also ahead whilst Grain and Tech and Ag and Animal missed. Gross margins were flat y/y however EBIT margins bsi improved by 160bps to 26.6% driving a+ 6% EBIT beat vs consensus. News Management reiterated its guidance for FY23 organic growth of 4-6% and EBIT margins bsi 25-26% however lowered FCF guidance to DKK1.8-2.2bn from DKK1.8-2.4bn previously mainly reflecting merger related special items. The merger remains on track to close in Q4 23/Q1 24. They are now awaiting antitrust approval in the EU and S Korea. Earnings and target price We tweak up FY23 Adj. EPS by 5% mainly driven by the lower interest and tax expenses but partly offset by FX. We lower our target price to DKK303/share vs DKK322 reflecting lower mid term assumptions. Investment thesis We are cautious on the longer term organic growth and premium valuation of both standalone Novozymes and of NewCo (merger with Chr Hansen). We are not yet convinced that the deal will fully address concerns on the sustainability of longer term growth and revenue synergies could be long dated. 15 questions for management You had previously identified Bioenergy as a segment with a ''below corporate average'' growth outlook over the mid term - has your view changed given the positive momentum in the newer areas (biodiesel, 2G)? How could the IRA and other policies supporting biofuels impact longer term Bioenergy growth?
Novozymes reported disappointing Q2 2023 results, with a 2% decline in revenue and a 4.2% drop in EBIT. The growth was driven by a positive performance in the BioEnergy segment, which was partly offset by the weakness in other areas. The downward revision to the FY2023 top-line outlook reflects the demand challenges and end-consumer trends. Although the BioEnergy momentum was something of a silver lining, the company may find it difficult to meet even its lowered targets, with little evidence of an improvement in customer volumes.
Summary of Q223 results Novozymes missed on both top and bottom line with Q2 organic growth of +2% (co cons +3.6%) with ~+6% pricing. All divisions missed on organic growth except for Bioenergy (+26% vs cons +17%). Household Care organic growth was flat, Food, Beverages and Human Health -3%, Ag, Animal Health and Nutrition -7% and Grain and Tech Processing -14%. Adj EBIT of DKK1011m missed consensus by -7% with margins of 24.0% vs consensus of 24.8%, declining -200bps sequentially despite a +130bps improvement in gross margin. News Novozymes lowered the FY23 organic growth guidance range to 4-6% from 4-7% previously. This implies an acceleration in H2 vs 3% in H1 against easier comps but also assuming a ''levelling-off'' of consumer destocking headwinds. Earnings and target price We make changes to our estimates to reflect learnings from the Q2 release and recent moves in FX. Our target price remains unchanged at DKK322/share. Investment thesis We are cautious on the longer term organic growth outlook and premium valuation of both standalone Novozymes and of NewCo (merger with Chr Hansen). We also expect the uncertainty of the pending merger transaction to remain an overhang on shares with the deal not expected to close until Q4 23/Q1 24. 15 questions for management Novozymes only started to call out destocking headwinds in the guidance from Q2. Why do you think you were impacted by destocking several quarters later than ingredients peers who first flagged destocking in late 2022? What gives you confidence that destocking headwinds will ''level-off'' in H2?
Novozymes reported Q1 23 revenue growth of 5% to DKK 4.62bn, driven by strong momentum in BioEnergy and ‘Agriculture, animal health & nutrition’. Although ahead of the consensus, the numbers missed AV’s estimates. The adjusted EBIT was DKK 1.2bn with a margin of 26%. The FY23 outlook targeting 4-7% of top-line growth and an adjusted EBIT margin of 25-26% was reiterated. We expect no significant changes in our estimates.
Q1 organic growth led by pricing and favourable timing of orders Novozymes reported Q1 23 organic growth of 5% ahead company consensus of 3.3%, driven by pricing. Organic growth in Bioenergy and Ag and Animal came in well ahead of expectations (in part due to timing of orders), whilst Food, Beverages and Human Health and Grain and Tech missed. Adjusted EBIT excluding one offs was broadly in line with consensus with margins of 25%, -210bps y/y but +160bps q/q reflecting still elevated input and logistics costs. We make only small tweaks to estimates Despite the organic growth beat, management sounded more muted on Q2 given the order timing benefits in Q1 and ongoing supply chain constraints in Human Health. Management reiterated guidance for 4-7% organic growth for FY23, with consensus within the range at 5.2% and vs our 5.6%. Pricing coming through but input inflation still a drag Novozymes still expects over half of the growth this year to come from pricing. As we have written in the past, it is good to finally see a positive impact from price initiatives after years of 1-2% price deflation. However we note this will not fully offset input inflation with gross margins expected to be flat y/y but still down 310bps from 2021, despite a focus on ''value based'' strategic price initiatives. Limited positive catalysts in the near term and little room for error, stay Underperform With volume growth more likely back end loaded and input costs still elevated due to the impact of hedges, we see limited catalysts for earnings upgrades in the shorter term. In any case we also expect the uncertainty of the pending merger transaction to remain an overhang on shares. Referring back to Danish doubts, we remain cautious on the transaction itself as we are not convinced that the deal will fully address longer term growth concerns on both Novozymes and Chr Hansen and synergies could be long dated. Shares are trading on a PF valuation of 17.6x 2024 EV/EBITDA, at...
Novozymes reported mixed Q4 22 earnings, as the top-line beat was offset by an earnings miss. Organic growth of 11% was attributable to broad-based growth even as profitability missed expectations on account of raw material headwinds. Importantly, growth in Household and Food, Beverages & Human Health bounced back strongly. FY23 revenue growth is expected to come in at 4-7% with the adjusted EBIT margin at 25-26%. We will trim our estimates, to factor in the softer than expected margin guidance.
Mixed Q4: better growth but weaker margins and cash flow Novozymes reported Q4 organic growth of 11% ahead of consensus of 9%. However EBIT missed by 6% due to weaker gross margins and FCF came in lower than expected due to negative working capital and additional costs related to the Chr Hansen merger. Pricing initiatives stepping up, although still playing catch up with inputs For FY23 management expects 4-7% organic growth, with pricing contributing to over half of the growth but starting with a ''modest'' Q1 bearing in mind tough comps. EBIT margins are expected to be 25-26% vs underlying margins of 26.4% in FY22 assuming a lagged impact from input cost inflation in part due to hedges. We nudge up FY23 organic growth to 5% vs 3.7% but lower EPS by 6% driven by FX headwinds and higher tax and net interest. A lot to keep management busy in 2023 Management will have a lot on their plate in 2023, navigating macro volatility whilst making progress towards the Chr Hansen merger. With Novozymes'' current management (CEO and CFO) appointed to run NewCo, all eyes will be on management to demonstrate progress on its own self-help journey as the company has just started to rebuild its track record after many years of disappointing growth. Merger with Chr Hansen: a complex deal at a premium price Prior to the deal, we were cautious on the standalone investment cases for both Novozymes and Chr Hansen on LT organic growth risks (we are below mid term targets for both) and their premium valuation to peers. As discussed in our recent note Danish doubts, we are not convinced that the deal will fully address those growth concerns or that it creates more value than could have been achieved standalone. Shares are trading on a PF valuation of 18x 2023 EV/EBITDA, still one of the highest in the sector. With a long lead time on the merger (closing expected Q4 23/Q1 24), concerns around deal execution and integration will likely weigh on shares over the next...
Merging to create a global leader in biosolutions Novozymes and Chr Hansen announced the intention to merge in December, to create a biosolutions leader with pro forma revenues of EUR3.5bn and EBIT of EUR900m. Management believes the combination will ''unleash the full potential of biological solutions'' with more diversified exposures which will help to ''de-risk'' the longer term organic growth outlook and innovation pipeline and will be even better equipped to address sustainability challenges. A complex deal at a premium price, with limited accretion (4% to ROCE) There is no debate that both Novozymes and Chr Hansen are individually strong players in the biosolutions space. However we are sceptical that this deal will create more value than could be achieved standalone bearing in mind the complexity of the transaction and the lack of past experience in large scale MandA. The pro forma mid term targets of 6-8% organic growth and 29% EBIT margins do not offer upside to the sum of existing standalone targets. Value of synergies fully transferred to Chr Hansen shareholders The initial deal terms implied that Chr Hansen shareholders receive a blended 38% premium to the undisturbed share price or an absolute value of ~EUR3bn. We estimate the NPV of synergies to be worth ~EUR2bn which suggests that more than 100% of the synergy value is transferred to Hansen holders. Both stocks have since derated (perf now linked by the exchange ratio) reflecting profit taking from Hansen holders and disappointment on the deal terms from Novozymes holders. We reiterate our Underperform rating on Novozymes, Chr Hansen back to Underperform Prior to the deal we were negative on the standalone investment cases for both Novozymes and Chr Hansen on LT organic growth risks and their premium valuation to peers. We are not convinced that this deal will fully address those growth concerns and PF valuation of 18x 2023 EV/EBITDA remains one of the highest in the sector....
NZYMB NSISB CHR CHR
Novozymes and Chr. Hansen have entered into a €25bn merger agreement to create a bio solutions major with annual revenues of €3.5 billion, expected to grow at a CAGR of 6-8% with an EBIT margin expected to reach 29% by 2025. Although we see the strategic merits, this comes across as an expensive deal. No wonder that Novozymes stock price is down by ~13.6% since the announcement while Chr. Hansen stock price is up ~21%, as of pixel time.
Novozymes reported Q3 22 numbers in-line with the preliminary headline numbers released last month. Q3 sales were up 6% with the EBIT margin at 29.5%. The firm re-iterated it FY22 outlook (8-9% top-line growth and a 30% EBIT margin), which had been upgraded during the preliminary announcement. We do not expect any significant changes to our estimates, as the optimism from the strong Q3 will be offset by the implied weakness in margins.
No surprises on Q3 after the recent pre-announcement There was not a lot of incremental news in Novozymes'' Q3 release following the recent preannouncement. Management confirmed Q4 has started well, reaffirming its recently upgraded FY22 organic growth guidance range of 8-9% and EBIT margin range of 26-27% (we and consensus are already within the range). However they also lowered FCF guidance by DKK400m to DKK1.3-1.7bn due to phasing of the Alternative Proteins capex investment. We nudge estimates up mainly on FX and marginally on pricing. We forecast organic growth of 8.7% in 2022 and 3.8% in 2023. Input costs and pricing stepping up in 2023 Despite initial pricing efforts, Novozymes expects 250bp gross margin compression to 55% in 2022 due to input cost inflation. They do expect pricing to step up sequentially and have now confirmed more than two thirds of the price increases planned for 2023. These efforts should keep EBIT margins at or above its stated ''floor'' of 25%. This compares to an underlying margin of 26% in 2022 and suggests that they will not be able to fully recoup 2022/23 input inflation by the end of 2023 (assuming no significant change in operating costs this guidance implies a gross margin of c55%). All the good news for H2 well known, little room for error into FY23 against tougher macro We recently downgraded Novozymes to Underperform as the good news on current topline strength now seems to be well understood. Shares are at a 35% premium to Ingredients peers which looks vulnerable in our view for organic growth in 2023 in line with peers. We see little room for error into 2023 against a backdrop of macro uncertainty, rising interest rates, moderating commodity prices and destocking risk (and a tough comp). If we could ask one question (more inside) Can you discuss what you have done to secure two thirds of price increases for 2023? Does it mean you have negotiated increases for two thirds of your volumes/contracts? Or...
Reducing forecasts: Following weaker than expected H119A numbers, we pull back our FY19E FD EPS 2.6% to DKK11.12 from a 2.2% reduction in both EBIT to DKK4094m and revenue to DKK14.61bn. Note that the FY19E downgrade is mitigated by an unexpected DKK455m in “other operating income” reported in Q219A attributed to a recognition of deferred income and divestment of a pharma-related royalty. Without this contribution, we would have pulled back our FY19E FD EPS by c.16% EPS. Innovation yet to deliver: Novozymes prefers to grow organically, developing enzyme systems and processes in-house to drive revenue and earnings growth. As such, the market has been waiting for the much heralded Freshness platform to start delivering as a global innovative offering. However, we believe that it remains in powder rather than liquid format and geographic expansion is only into developing markets. Combined with pressure in core businesses such as starch and baking, we believe Novozymes is finding it difficult to deliver growth. Risk is to the downside: Novozymes is trading at 26.2x FY19E P/E and 15.9x EV/EBITDA, a 12.4% discount to its peers. In our H119 preview we noted that in a range-bound stock, disappointing results had tested support at DKK300. Continued LFL revenue and EBIT margin decline has now seen the price break through that support level. That said, on our revised forecasts and terminal growth rate (down to 4.0% from 4.2%) our DCF-derived PT only falls to DKK310 from DKK325, implying a FTR of 8.4%. While that supports our unchanged Hold recommendation, we would caution that we believe the risk is to the downside.
Revenue weak but margins strong Novozymes issued mixed Q219 numbers this morning (enumerated on Table 1 overleaf) reporting a 17.7% increase in FD EPS to DKK3.12 (INVe DKK2.78) from a 24.2% increase in EBIT to DKK1189m (INVe DKK1016m) despite a 1.1% decrease in revenue to DKK3458m (INVe at DKK3686m). A LFL revenue decline of 2.0% (INVe +3.6%) was somewhat balanced by a 0.9% FX tailwind (INVe 2.3%). In its Q119 IMS, management kept margin guidance unchanged at between 28% and 29% but tweaked sales growth guidance from a 3-6% range to a 3-5% range. This guidance has now been further reduced to organic sales growth of 1-3% augmented by a 0.5-1.0% addition from FX giving reported revenue growth of 1.5% to 4.0%. EBIT margin guidance was retained at 28-29%, as was net profit growth in the 3-8% range. All division reported LFL revenue declines Every division reported a LFL revenue decline in the quarter which was unexpected. Household Care reported a 1.0% LFL revenue decline. A 1.4% FX tailwind resulted in reported revenue growth of 0.4% to DKK1122m (INVe DKK1140m). A 3.0% revenue decline in Food & Beverages was somewhat mitigated by a 1.6% FX tailwind tempering the reported revenue decline to 1.4% to DKK1028m (INVe DKK1118m). In Bioenergy, while organic revenue declined by 1.0%, a 4.0% FX tailwind saw reported revenue increase by 3.0% to DKK716m (INVe DKK776m). The Agriculture & Feed division reported a LFL revenue decline of 7.0% (INVe -1.0%) which was further impacted by a 1.4% FX headwind resulting in an 8.4% decline in reported revenue to DKK404m (INVe DKK440m). The Technical & Pharma division reported a 6.5% decrease in revenue in the quarter to DKK188m (INVe DKK211m) comprising a 2.0% LFL revenue decline and 4.5% FX tailwind. All to do in H2 Weakness in Household Care (32.4% of H119 revenue) was attributed to challenges in the Middle East due to “economic distress” in some markets, while in Food and Beverages (29.7% of H119 revenue), weakness was attributed to poor sales in baking (Middle East again flagged) and baking price adjustments in North America. Starch sales “stabilized” in Q219. Coming into the H119 results, the market was expecting a 2.6% increase in net income from a similar increase in reported revenue, with an EBIT margin of 28.0% (source: Bloomberg) (we had net income 2.2%; revenue 3.8%; EBIT margin 28.0%). With revenue expectations reduced, if guidance is to be incorporated into forecasts, a marked expansion of margins in H219 is required. We are having to believe that H1 weakness will be made up in H2 strength, which might be hard to accept at face value, potentially leading to price weakness.
Forecasts tweaked on FX movements: Having published revised numbers in late April (A quarter of challenges), and with little change in the markets the company operates in over the interim period, we only adjust our numbers on FX movements coming into Novozymes’ H119A results, which are due on 8 August. This results in a 0.2% increase in our FY19E FD EPS to DKK11.41 from a 0.1% uplift in forecast revenue to DKK14.94bn. Divisions facing challenges: In its Q119A results release, the company noted continuing challenges in the Middle East, a decline in baking and starch enzyme sales, lower bioethanol production, floods in Midwest US and lower feed enzyme sales as factors impacting the business. While we presume that the flood impact has abated, we believe the other factors will have continued to impact performance through H219. As such, we forecast the company will report a 4.9% increase in Q219E FD EPS to DKK2.78 on a 6.2% increase in EBIT to DKK1016m and 5.4% increase in revenue to DKK3686m. At fair value: Novozymes is trading at 27.6x FY19E P/E and 17.7x EV/EBITDA, what we consider to be a justified 6.0% discount to its peers. We continue to value the company on a DCF basis and, given the marginal nature of our forecast changes, our PT remains unchanged at DKK325. The share price has been largely range-bound between DKK300 and DKK325 over the past six months, with little sign of a catalyst to break through resistance and disappointing results testing support. Without the catalyst of acquisitions (the company prefers to grow organically), other than unexpectedly strong H119 results, we do not see a short-term catalyst to drive an upward re-rating. Hold.
Share: