EUR 850.00 For Business Accounts Only

Morningstar | Solid Growth for Givaudan in the First Half; Margin Decline in Fragrances Is a Temporary Issue

Wide-moat Givaudan shares are trading off 2%-3% after reporting first-half results, which is somewhat surprising given that organic growth of 5.6% and EBITDA of EUR 601 million were slightly ahead of consensus estimates. Potential negative items were a decline in free cash flow for the group and a sharp drop in margins in the fragrance segment. We don’t find either concerning and therefore don’t expect to materially change our CHF 1,900 fair value estimate. At current levels, shares are trading in 2-star territory.

We still see evidence of our sector themes playing out. In particular, we expect high growth to be found in local and regional customers, naturals, and adjacent markets like active beauty. In the first half, Givaudan reported strong growth from local and regional customers in Latin American and North American consumer fragrances, active beauty, and Asian flavours. Active beauty was reported to have grown by double digits in the first half. Finally, Givaudan’s recent acquisition of Naturex is telling of the growing importance of naturals in this business.

In fragrances, first-half organic growth was 6.5%, indicating an acceleration from first-quarter growth of 5.7%. Fine fragrances remains the driver, with 15.6% organic growth in the first half from sustained new wins and an easy comparable. However, the underlying EBITDA margin fell 390 basis points to 22.4%, primarily due to supply disruptions from the force majeure at BASF’s citral plant. This plant is already in the process of ramping back up. While this may affect Givaudan for another quarter or two, it is a temporary issue.

In flavours, first-half organic growth was 4.9%, indicating a slight acceleration from first-quarter growth of 4.5%. Thus far, emerging markets have been the fastest-growing with double-digit increases recorded in the key markets of China, India, and Brazil. The Middle East is weak, while growth in North America is low, owing primarily to a tough comparable. Despite the inflationary environment in raw materials, the underlying EBITDA margin increased 30 basis points to 24.2%.

Givaudan management is participating at the Management Behind the Moat conference, which will be held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending the conference, please reach out to your sales representative for registration information.