Morningstar | Chr. Hansen Reports 2Q Results, Announces Pharma Joint Venture With Lonza; Shares Rich
Chr. Hansen reported second-quarter and semiannual results for fiscal 2019 with group sales growth of 8% (6% volume, 2% pricing) and 7% (6% volume, 3% pricing), respectively, broadly in line with our estimates. The company also announced the signing of an agreement with Lonza to create a strategic joint venture in the contract manufacturing market for bacteria-based pharmaceuticals (live biotherapeutics), which bonds well with the company's aspiration to further develop its human microbiome lighthouse and utilize its unique microbial capabilities. Group EBIT margin before special items was up 0.8 percentage point to 27% year to date, the result of higher capacity utilization at the Copenhagen site and profitability improvement in the natural colors division. Although management confirmed midterm guidance and organic growth for fiscal 2019 (9%-11% versus 9.7% in our model), it lowered organic growth for natural colors to 5%-7% from 6%-9% based on declining raw material prices and weakness in Asia-Pacific and Latin America. Given this broadly in-line set of results, we maintain our DKK 600 fair value estimate and wide moat rating. The shares are still trading in 2-star territory despite being down 6% after the results announcement.The agreement with Lonza is expected to close in the first quarter of 2020 subject to merger control clearance. The new joint venture will be one of the first movers in the emerging market for live biotherapeutics products, a market that according to management's estimates will be worth EUR 150 million-200 million by 2025 and more than EUR 1 billion by 2035. The two companies will share investments of EUR 90 million combined over three years, with the joint venture expected to be largely self-funding after the first phase. As a result, although there were no changes in guidance, Chr. Hansen's ability to distribute excess cash to shareholders in those first three years will be limited.
Chr. Hansen is a biosciences group based in Denmark. Co. develops and supplies natural ingredient solutions for the food, pharmaceutical, nutritional, and agricultural industries worldwide. Co. operates in three divisions: Cultures and Enzymes (develops, produces, and sells cultures, enzymes, and probiotics for the food and dairy industries); Health and Nutrition (develops products for the dietary supplement, over-the-counter pharmaceutical, infant formula, and animal feed industries); and Natural Colors (develops natural color solutions to the food industry, primarily for the beverage, dairy, confectionery, fruit preparation and ice cream, as well as functional blends for processed meats).
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