Investeringskommentar, Kelsey Tsai, Analyst, 10/08/2016
After Novozymes lowered its full-year guidance during its second-quarter earnings release, the consequent stock sell-off places the company’s share price roughly in line with our DKK 265 fair value estimate. Novozymes lowered its full-year guidance for organic sales growth to 2%-4% from 3%-5%, although reported sales and net profit guidance remained unchanged. Unexpected headwinds in the agriculture and feed business, coupled with a worse-than-anticipated pricing environment in the bioenergy markets were to blame. We do not plan on changing our fair value estimate as the second-quarter weakness was largely reflected in our original assumptions--our minor near-term forecast updates were offset by the time value of money. Despite recent challenges, we believe wide-moat Novozymes’s innovative and diversified enzyme business will allow the firm to maintain strong returns on capital for the foreseeable future.
Soft second-quarter sales in the agriculture and feed and bioenergy units were offset by solid growth in the household care and technical and pharma segments, amounting to flat year-over-year growth (3% in constant currency) and revenues totaling DKK 3,429 million. Household care products grew 3% (4% in constant currency) from last quarter thanks to U.S. demand for premium detergent products, while the technical and pharma unit grew 18% (22% in constant currency) off a relatively small base. Food and beverage sales were a mixed bag, resulting 1% revenue growth from a year prior (3% constant currency).
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 probably 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.
