Reducing forecasts: Incorporating H119A numbers into our model along with the implications on margin development and interest costs drives a considerable downward revision to our earnings forecasts (-8.7%, -11.0% and -9.7% for FY19E, FY20E and FY21E, respectively). Last year, downgrades were driven by citral shortages; this year, it is raw material price increases and the lower-margin nature of the Naturex business, which the market had not fully appreciated. It’s those margins again: When Givaudan acquired Naturex, we argued it had paid full price (17.9x forward EBITDA) for a company that had seen EBITDA margins slip to 11.2% in FY14A, before recovering to 15.8% by FY17A. At the time, Givaudan’s FY17A EBITDA margin was 21.6%. The unknown at the time was whether or not Naturex’s margin expansion could continue. Margin pressure since mid-2018 would suggest that progress has not been up to expectations. Behind the curve: We believe it is not a good sign when a company looks to grow earnings through cost-cutting, which we consider is part of the GBS mandate. The fact that another GBS goal would appear to be adapting the business to deal with a larger volume of smaller orders from local and regional players indicate to us that the company is behind the curve relative to peers such as Kerry, who have had such processes in place for a number of years. Overpriced: Givaudan trades at 35.6x FY19E P/E and 22.3x EV/EBITDA, a 24.0% premium to peers. We value Givaudan on a DCF basis. Running the revised forecasts into our model while reducing our terminal EBITA margin to 19.5% from 21% to reflect the impact of Naturex on Group margins generates our new PT of CHF2465. As this implies a FTR of -8.6%, we downgrade to Sell.

Givaudan

• 19 Jul 19
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Revenue in line, but margins weaker than expected Givaudan has issued a weak set of H119 numbers, driven by lower than expected margins (EBITDA margin 21.3% versus INVe at 22.7%) as revenue was ahead of expectations (see Figure 1 overleaf). The company reported a 2.4% increase in EPS to CHF41.24 (INVe CHF45.18) from a 9.8% increase in EBITDA to CHF660m (INVe CHF695m) and 15.7% increase in Group revenue to CHF3,094m (INVe CHF3,064m). LFL revenue grew by 6.3% versus our expectation of 6.2%, with acquisitions making a 10.6% contribution (INVe 10.2%). Acquisitions the main revenue driver At the divisional level, Fragrance EBITDA increased 8.0% to CHF270m (INVe CHF284m) from an 11.3% increase in revenue to CHF1,361m (INVe CHF1,354m). The division reported LFL revenue growth of 8.6% (INVe 8.5%) with acquisitions adding a further 4.1% (INVe 3.9%). Flavour EBITDA increased 11.1% to CHF390m (INVe CHF410m) on the back of a 19.4% increase in revenue to CHF1,733m (INVe CHF1, 710m). The main driver over the period was the contribution from the Naturex acquisition (16.1% reported versus INVe at 15.5%) with LFL revenue growing at 4.4% (INVe 4.1%). Naturex and raw material costs cited as margin contractors As in the last few company updates, the issue over the past six months has not been top line growth, but margin contraction. This time last year it was the impact of the citral supply disruption on Fragrance division profits, which has been resolved. This year, the lower margin nature of the Naturex business in Flavor and higher raw material costs in Fragance were called out by management. Additional costs were also incurred in the Givaudan Business Solutions programme. Long-term goals reiterated, short-term forecasts may be clipped The company has reiterated its long term guidance to outpace the market with 4-5% sales growth and a free cash flow of 12-17% of sales, measured over a five-year period out to 2020. On a more short-term basis, consensus is looking for Givaudan to generate sales and EBITDA growth of 11.5% and 15.5%, respectively, in FY19, with underlying growth augmented by the Naturex acquisition. While the market will be comforted by the revenue performance, margin pressure may see consensus earnings expectations tick down 2-3%.

Givaudan

• 18 Jul 19
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