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DSM has made a big move towards its long-term ambition of becoming a leading Nutrition, Beauty and Well-Being company. Planned as a merger of equals, the deal with Firmenich will not be expensive and the cash compensation to Firmenich shareholders will come from the divestment of the remaining Materials business.
This confirms our strong view on DSM as well as its strategic perspectives.
Companies: Koninklijke DSM N.V.
DSM had a strong start to the year, beating consensus. Higher sales prices remained growth driver and were implemented to protect margins, which have challenged by input cost inflation.
The beat on the reported figures was not meaningful enough to revise our estimates.
DSM reported a good set of FY 2021 figures, despite the pressure on Nutrition’s margin in Q4. Higher sales prices were implemented to roll over the higher input costs. Materials increased its margin in the same quarter.
The already announced change in DSM’s group (reporting) structure (separation of Materials) and the integration of the former Innovation Centre into the single units/divisions as of 01/01/2022, is another milestone in DSM’s long-term portfolio rearrangement history.
Nutrition saw strong demand in Animal Nutrition as customers worried about limited availability and wanted to operate with higher inventories. The Materials division was still on the chemicals bandwagon, which changed from the drag horse ‘higher volumes’ to one named ‘higher sales prices’ in order to cushion the to-be-feared higher raw material prices. The unchanged guidance does not look too conservative when it comes to EBITDA as this would demand a strong final spurt.
It looks as if DSM’s management saw our Business & Trends section and found the idea of separating Materials and finally divesting the business looked compelling. In our view, this was too obvious to not become reality. The more subdued result is the push towards DSM’s ESG targets, which is not a disadvantage in our view.
The announcement perfectly fits into our picture, but some more financial details would be helpful.
Materials reported a more than strong performance in Q2. Strong demand came from its usual suspects (automotive, electronics & electrics) and the restocking along the full value chain. This development come not fully out of the blue, but was more pronounced than expected by the consensus (top line: +2.9%; adjusted EBITDA: +9.3%). Reported figures fit into our broad picture as the company sees a more challenging H2 21, which is in line with our expectations.
DSM’s Q1 trading statement was characterised by the continuing momentum in Nutrition’s good organic growth and by Materials’ exceptional recovery in volume growth. Both developments were beneficial to profitability.
Q1 figures were broadly in line with our expectations, but beat consensus by +2% on sales and +4% on the profitability line.
... the information provided leaves us a bit puzzled. In our view, the given guidance and dividend proposal do not fit well. Furthermore, DSM’s FY adjusted figures were moderately above consensus (+1%), but they were a clear miss to our hard profitability figures (EBITDA: -7%), which demands a deeper look. However, the recently shaped more pronounced nutrition company reported resilient figures against the backdrop of the pandemic.
We dislike the new reporting frequency.
The restrictions implemented in the pandemic have caused some material changes in people’s behaviour. Furthermore, people are trying to protect themselves as effectively as possible by supplementing their diets. DSM’s Nutrition business continued to benefit from this trend, driving adjusted EBITDA higher. The chemicals business, Materials, was negatively impacted by a strong volume decline but reported a strong pickup in demand during the quarter.
The absolute Q3 figures were slightly below ou
The announced divestment of Resins & Functional Materials (RFM) will add some cash to DSM’s balance sheet, which will be of some relief to the not too tight debt. But the divestment raises a long lasting question: what is management’s strategy, especially regarding Materials?
We see a continuation of Mr Sijbesma’s strategy since the two co-CEOs have taken control, but nothing material has happened so far. Taking out nearly 40% of the top-line, this needs to be answered.
DSM’s Q2 figures were strongly supported by Nutrition’s strong performance. Profitability could not be sustained as Materials could not get away from its chemicals’ nature, suffering from deteriorating profitability. The reported figures were a bit stronger than expected, but were in line with the street’s expectations. The strong impairment nobody had on their radar. Management is implementing additional cost-cutting measures in H2, which are expected to deliver annual savings of €25-30m.
The acquisition of Erber Group helps DSM to get deeper into the field of food and feed safety. The purchase price reflects a premium on the high margin business. The acquisition fits into DSM’s strategy.
DSM’s figures were characterised by the expected pattern: Nutrition fairly resilient and Materials suffering. The group’s profitability was nevertheless a bit subdued in our view, despite the consensus (based on adjusted figures) beat. Removing Materials’ guidance from the table was fairly logical for us in that most, if not all, chemicals companies have also done this. We don’t like the (partly) debt-financed share buyback programme in these challenging times.
Or perfect timing. The reported 2019 figures were not bad and broadly confirmed our view on the company and the street’s expectations. But they were not glittering like at other companies when a CEO leaves. If he had another year, we would have written ‘uninspired figures’. The figures leave the new CEO couple (business-wise) enough room for development. Hopefully, they will take a chance as the current Strategy 2021 doesn’t make us feel very enthusiastic.
... spoil the broth. DSM’s long-term (13 years) CEO, Mr Sijbesma, will be succeeded by two Co-CEOs, Mrs Matchett and Mr de Vreeze as internal solutions. As the company strongly needs a new mid- to long-term strategy, we do not believe two people at the same level is a great idea. Mr de Vreeze’s promotion could be a hint of what might come next. We think. The Materials division also needs a clear strategy. One could be an exit.
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What’s cooking in the IPO kitchen?
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