Investeringskommentar, Stefan Quenneville, Analyst, 20/4/2016
We do not plan on materially changing our DKK 265 fair value estimate for Novozymes following first-quarter results that largely met our expectations and were soft primarily because of ongoing challenging conditions for the bioenergy business. The shares have bounced back after a sell-off earlier this year and appear to be fully valued now. We are maintaining our wide moat and stable trend ratings as the firm's ongoing solid operating performance and still positive outlook continue to demonstrate the attractiveness of Novozymes' diversified industrial enzyme business.
For the quarter, revenue grew only 1% (2% constant currency) to reach DKK 3,452 million, as the prior trend of krone depreciation versus the U.S. dollar reversed itself somewhat in the quarter. Strong technical and pharma (35%, 37% constant currency) and tepid household care (4%, 5% cc) and food and beverages (1%, 2% cc) growth bolstered very weak agriculture and feed (down 10%, down 8% cc) and bioenergy (down 5%, down 6% cc) results. Novozymes maintained its impressive operating margin of about 28% (excluding reorganization costs) thanks to ongoing productivity improvements. Earnings per share reached DKK 2.43, increasing 7% from DKK 2.27 a year ago.
While the company lowered its revenue and EBIT growth outlook for the year to 1%-3% from 3%-5%, it is maintaining its net profit growth target of 8%-10%. We view this as encouraging, given the challenging condition in its bioenergy business, which we expect to contract further in 2016 as low oil prices stifle growth prospects for bioethanol producers and reduce visibility for investments in 2G cellulosic ethanol plants.
Bulls Say
- Novozymes is the dominant player in the industrial enzymes market, allowing it to generate high margins and returns on capital.
- Second-generation biofuels are poised to grow significantly as new plants are being built, creating significant new demand for Novozymes’ products.
- Growing demand in emerging countries will continue to allow opportunities for Novozymes to gain share in the detergent and food and beverage markets.
Bears Say
- The company’s focus on the ethanol production market is dependent on U.S. energy policies that could be subject to sudden political change.
- Novozymes' largest end markets--household care and food and beverage--are maturing, and growth rates will likely be lower than in the past.
- Current high valuation multiples incorporate high expectations for growth and margins. With increasing competition and expansion into new markets, the company may not be able to meet such high benchmarks.
