EUR 850.00 For Business Accounts Only

Morningstar | Raw Material Inflation and Naturex Crimp Givaudan's Margins; Shares Overvalued

Wide-moat Givaudan reported slightly disappointing results, mainly due to margins. Organic growth of 5.3% in the fourth quarter and 5.6% for the full year beat consensus expectations and our estimates. However, the second-half EBITDA margin was down more than 250 basis points due to raw material inflation and the consolidation of Naturex. While both of these negative issues were well-known, the magnitude of the impact was somewhat surprising. Furthermore, these problems will not abate in the near term. Raw material inflation is expected to be 5%-6% in 2019, and Givaudan doesn't expect margins to be restored to pre-Naturex levels by 2021. On the bright side, the company expects Naturex to deliver 10% annual organic growth starting in 2021. We don’t expect to materially change our CHF 2,000 fair value estimate. At current levels, the shares remain in 2-star territory.

The company maintained its guidance for 4%-5% organic sales growth and 12%-17% free cash flow as a percentage of sales, on average, for 2016-20. Givaudan met these targets in 2018 with 5.6% organic growth and free cash flow of 12.7% and is on track for 2016-18. We expect the growth target to be achieved again in 2019 although free cash flow will be more a challenge, given negative working capital implications from raw material inflation and Naturex’s high inventory levels.

The highlight of the fragrance division for 2018 was 10.7% organic growth in fine fragrances on a tough comparable. Givaudan is now the global leader in this business. With increasingly challenging comparables and a likely slowdown in global growth, we expect growth in this somewhat cyclical business to finally decelerate in 2019.

The flavour division continued to progress well in 2018 in key strategic areas. In particular, organic growth was in the double digits in health and well-being and high single digits in naturals.