DSM-Firmenich Earnings: Animal Nutrition and Health to Be Separated From the Group; Stock Up by 14%

Wide-moat DSM-Firmenich reported 2023 annual results with adjusted EBITDA of EUR 1.8 billion, in line with company-compiled consensus, our estimates and guidance. The highlight of the update was the announcement of plans to separate the animal nutrition and health business from the group, slated for 2025. Although we didn’t expect this announcement so soon after the completion of the merger, we believe this is the logical next step for DSM-Firmenich, considering the commoditized nature of the ANH business and the substantial toll that animal feed-grade vitamins have taken on earnings in recent quarters. The move will reduce earnings volatility and decrease capital intensity, allowing DSM-Firmenich to become fully focused on defensive consumer end markets. We view the decision as positive for our moat rating and Morningstar Uncertainty Rating, likely to result in a multiple rerating. Unsurprisingly, investors welcomed the news, sending shares around 14% higher in intraday trading. Although we will tweak our short-term estimates downward to reflect prolonged angst in the vitamins market weighing on 2024 profit, we don’t expect to make a material change to our EUR 135 fair value estimate as the Feb. 15 announcement has instilled more confidence in our long-term forecast and management’s commitment to maximize shareholder value. Despite the Feb. 15 run-up in price, we believe the current share price still offers substantial upside of around 30% for patient investors.