Company Reports

We confirm our EUR 130 fair value estimate for wide-moat DSM-Firmenich after it reported first-quarter 2024 adjusted EBITDA of EUR 463 million, in line with the Vara consensus. This represents an 11% decrease compared with the same period last year, which was mainly attributed to ongoing challenging market conditions in vitamins. Still, management indicated that market momentum is improving and confirmed full-year EBITDA guidance of at least EUR 1.9 billion, which is broadly aligned with our forecast of full-year adjusted EBITDA of around EUR 2 billion.

DSM-Firmenich is one of the largest consumer chemical companies in the world. A majority of revenue is derived from segments that benefit from leading market positions across increasingly consolidated industries, such as flavor and fragrance, and the broader food ingredients market. This has earned the company a wide moat, stemming from intangible assets and switching costs.

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.

Wide-moat DSM-Firmenich reported third-quarter adjusted EBITDA of EUR 409 million, roughly in line with the EUR 405 million company-compiled consensus. Trading conditions remain difficult across vitamin end markets, with no signs of abating in the fourth quarter. This caused management to narrow its full-year adjusted EBITDA guidance to EUR 1.8 billion, the lower end of its prior EUR 1.8 billion-EUR 1.9 billion range. It revised the negative impact from the vitamins business to EUR 500 million for the year from EUR 400 million. Despite the more negative outlook, the market reacted positively to DSM-Firmenich’s update, sending shares around 7% higher at the time of writing. We believe this is due to an improvement in cash conversion in the quarter thanks to increased management focus, as well as to more clarity provided around longer-term plans to restore vitamins profitability and drive cost and revenue synergies following the merger. We lowered our fair value estimate to EUR 135 per share from EUR 140 after incorporating the short-term EBITDA headwinds (our forecast was at the upper end of the prior range). Our long-term forecast is unchanged, with EBITDA margin expected to reach 23% by 2032 and revenue growth just shy of 5% on average between 2024 and 2032. We believe the shares still offer plenty of appreciation potential for patient investors, trading in 5-star territory.

DSM-Firmenich is one of the largest consumer chemical companies in the world. Following the merger of Firmenich and DSM, a majority of revenue is derived from segments that benefit from leading market positions across increasingly consolidated industries, such as flavor and fragrance, and the broader food ingredients market. This has earned the company a wide moat, stemming from intangible assets and switching costs.

Wide-moat DSM-Firmenich’s 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 are initiating coverage of DSM-Firmenich with a EUR 140 per share fair value estimate and a wide economic moat rating. The company was formed following the merger between narrow-moat DSM and privately held Firmenich. It combines DSM’s capabilities in nutrition, health, and biosciences with Firmenich’s leading position in the flavor and fragrance (F&F) industry (as one of the top four players, along with wide-moats Givaudan, Symrise, and IFF). We believe the merger created a powerhouse in the consumer specialty ingredients market, enjoying switching costs and intangible assets across the majority of the segments.

DSM-Firmenich is one of the largest consumer chemical companies in the world. Following the merger of Fermenich and DSM, a majority of the revenue is derived from segments that benefit from leading market positions across increasingly consolidated industries, such as flavor and fragrance, or F&F, and the broader food ingredients market. This has earned the company a wide moat, stemming from intangible assets and switching costs.

Narrow-moat DSM-Firmenich released a trading update for the second quarter of 2023, highlighting a further weakening in the vitamin market that is expected to result in a EUR 200 million hit to first-half pro forma adjusted EBITDA, projected to land in the range of EUR 920 to EUR 940 million, compared with EUR 1.17 billion for the first half of 2022. With the weakness now expected to continue in the second half of the year, amounting to a total adjusted EBITDA hit of around EUR 400 million for the full year, the company also announced an acceleration of post-merger strategic initiatives aimed at restructuring the vitamin business, which should ultimately reduce the share of revenue coming from the commoditized animal nutrition and health vitamin portfolio. Measures include the closure of some vitamin B6 and vitamin C plants and operations in China, reallocating part of the capacity to higher-quality, pharmaceutical-grade vitamin C, as well as extended shutdowns for the vitamin A and E plants in Sisseln, Switzerland, starting with the third quarter of 2023. Although we expect to reduce our fair value estimate after reflecting these short-term headwinds, we believe the announced strategic initiatives have the potential to lessen earnings volatility for the animal nutrition and health segment, as well as positively affect our economic moat assessment for DSM-Firmenich.

The merger of narrow-moat DSM and privately held Firmenich has created a specialty chemicals colossus, DSM-Firmenich, with leading positions in health and nutrition, and flavor and fragrance.