DSM Reports In-Line Fourth Quarter; Shares Undervalued

Narrow-moat DSM DSM reported fourth-quarter EBITDA of EUR 293 million, down 14% versus the prior-year period, but in line with Vara consensus. Given the merger with Firmenich is now at an advanced stage, the company will give guidance for 2023 after the transaction is completed.

Despite what looks to be a very in-line quarter, shares were up around 5% intraday, which was good enough to lead its peers. We surmise the market was likely more worried about the current challenged animal health business than what was indicated in consensus estimates. We don’t expect to make a material change to our EUR 150 fair value estimate. At current levels, the shares look undervalued.

Fourth-quarter organic growth was 3% in the core health, nutrition, and bioscience business as price increases of 6% offset a decline in volume of 3%. Weak performance was mainly concentrated in the animal health business due to lower vitamin prices and lower demand in ruminants and aquaculture given their relatively high price points while consumer purchasing power is declining. Animal health was the only division to report a decline in EBITDA while health, nutrition, and care, and food and beverage both grew EBITDA solidly, which we think supports our view that these segments have moats. Furthermore, DSM reported EBITDA margins for the first time at the segment level for these businesses. For the full year, animal nutrition had an EBITDA margin of 14.4% while food and beverage was at 17.2% and health, nutrition, and care was at an impressive 23% level.