DSM-Firmenich Earnings: Adjusted EBITDA In Line With Our Forecasts; Shares Undervalued

Wide-moat DSM-Firmenich’s DSFIR first-half 2023 results delivered few surprises, having been largely revealed as part of a trading update at the end of June. Pro forma adjusted EBITDA amounted to EUR 929 million, in line with the company-compiled consensus and our forecast. Still, this represents a decline of 21% compared with the same period last year and translates to an EBITDA margin of 15.1%—300 basis points lower than the first half last year and significantly below the company’s midterm target of 22% to 23%. As previously announced, the lower profitability was primarily the result of cyclically weak conditions in the vitamins market that affected the commoditized animal nutrition and health segment, and to a lesser extent the health, nutrition, and care segment. Management confirmed the guidance it issued at the end of June for full-year EBITDA of EUR 1.8 billion to EUR 1.9 billion.

We don’t expect to make material changes to our forecast in light of these results and confirm our fair value estimate of EUR 140. We believe shares are undervalued and expect to see a recovery as market conditions return to normal and restructuring measures start bearing fruit, most likely starting next year.

Apart from the low demand and low prices in the vitamins market, DSM-Firmenich’s first-half sales growth was also influenced by customer destocking, especially in North America—a common theme across the earnings updates of all the consumer ingredients manufacturers. This translated into flat and slightly positive organic sales growth for the perfumery and beauty and taste, texture, and health segments, respectively. Still, pro forma EBITDA margins were ahead of the first half of last year for these two segments, indicating that the mid-single-digit price increases implemented in this period have been enough to stabilize operating margins, albeit still leaving some recovery room compared with preinflation levels.