International Flavors & Fragrances: Shares Rally on Amended Debt Covenant Agreement

International Flavors & Fragrances IFF announced amendments to its credit agreement that will give the company higher leverage ratio covenants over the next nine fiscal quarters through Sept. 30, 2025. In exchange, IFF will pay a slightly higher interest rate and is not allowed to raise its dividend. Based on our current forecast, we think IFF should be able to remain within the new covenants, especially by the end of 2024 as the company should close the sale of its Lucas Meyer cosmetic ingredients business by then. As part of the announcement, management reiterated full-year 2023 revenue and adjusted operating EBITDA guidance.

We see no reason to change our outlook on IFF in light of the announcement. Accordingly, we maintain our $130 per share fair value estimate. Our wide moat rating is also unchanged. IFF shares rallied on the news that the company secured higher near-term covenants without having to cut the dividend, as well as the reiterated full-year guidance. However, at current prices, we view IFF as materially undervalued with the stock trading in 5-star territory.

Shares continue to trade below our downside scenario, which produces a fair value estimate of $80 per share. In our downside scenario, we assume little revenue growth and high-single-digit operating margins in a midcycle scenario, well below the company’s historical margins in the midteens. Accordingly, we see a strong margin of safety embedded in the current price.

For now, IFF’s dividend should be safe over at least the next year. Following the second-quarter earnings, we assumed IFF would have to renegotiate its covenants but thought the company would have to give up its dividend in exchange for covenant relief. However, if the company is able to divest the Lucas Meyer cosmetics business at a reasonable valuation and sees a slight rebound in profits in its businesses, which we expect will occur, the company should not run up against its new covenants through at least 2024.