EUR 850.00 For Business Accounts Only

Morningstar | Mixed Bag for Novozymes in 2Q; Shares Overvalued

Wide-moat Novozymes reported a mixed bag of results for the second quarter. Organic growth of 5% was a nice pickup from the disappointing 2% posted in the first quarter and led to first-half growth of 4% being in line with 2018 guidance of 4%-6% and our full-year estimate of 4.2%. However, beneath the headline number, underlying strength was less convincing, owing to abnormally high growth rates in the more volatile bioenergy and agriculture and feed segments, while the important household care business was down 2%. We’ve tweaked our near-term estimates for the segments, but we’re sticking with our 4.2% organic growth forecast for the group in 2018. We move our fair value estimate to DKK 285 from DKK 270 to account for the time value of money and a lower-than-expected currency headwind in 2018. At current levels, the shares look overvalued.

We were disappointed to see household care report negative organic growth in the second quarter. However, some one-off issues affected results--in particular, distribution issues at a large customer in North America and the truckers strike in Brazil, which several companies have reported as an issue this quarter. We remain optimistic for a better second semester with the launch of the freshness and hygiene platform. The first products hit the shelves this quarter in the Philippines, and the timing of the rollout remains on schedule.

Bioenergy organic growth rocketed upwards in the second quarter, rising 20% over 2017. This was particularly impressive given that global and U.S. ethanol production was up only 2%-3% in the same period. Nobody would expect this growth rate to be maintained, and comparatives for the second half of 2018 will be tougher. Nevertheless, the segment is on track for a stellar year. We are less optimistic in the medium term, given high ethanol inventories in the U.S. and thin producer margins.

Agriculture and feed had a strong result in the second quarter with organic growth of 13%. Strength firmly resided in BioAg, as the animal feed business was reported to be down due to challenging market conditions in Latin America. BioAg sales are generally heavily weighted to the second half of the year. We think some of those second-half sales were pulled forward with launch of the Acceleron B-300/B-360 corn inoculant. Consequently, growth will likely moderate over the rest of the year. We remain positive on the medium- to long-term potential of this business. Corn acreage using the new corn inoculant is expected to double in 2019, and there remains considerable runway for growth with this product.

Novozymes' management is participating in 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.