Morningstar | Novozymes' Soft 4Q Caps Modest Year; 2019 Outlook Provides Little Comfort
Wide-moat Novozymes reported 2% organic growth in the fourth quarter, below our expectations and consensus of around 4%. For the full year, organic growth was 4%, just meeting the bottom end of the 4%-6% guidance range. Unexpected weakness primarily resided in agriculture and feed, which reported negative organic growth, and household care, where challenges in the Middle East have carved around 1% out of total organic growth. Guidance for 2019 is for organic growth of 3%-6%, a slight downgrade from last year’s 4%-6%. Moreover, there seems to be a higher degree of uncertainty built into this year’s forecast, particularly in the agriculture and feed business. We expect to trim our 4.7% 2019 organic growth forecast but remain confident in the long-term prospects of the company. Consequently, we don’t expect to make a material change to our DKK 285 fair value estimate.The agriculture and feed segment is facing considerable uncertainty in 2019. Farm economics remain poor, little progress has been made in the U.S.-China trade war, and Novozymes is now renegotiating the BioAg alliance with new joint venture partner Bayer. While we don’t expect major changes to the joint venture agreement, the probability of a better deal for Novozymes is low, in our opinion. Organic growth guidance for the segment is wide at "a low-single-digit decrease to a mid-single-digit increase." With some improvement in the feed market from lower vitamin prices and increasing penetration of new products, we expect low-single-digit growth for the year, although the first quarter will likely be negative. In the long term, we remain constructive on the potential of this business due to its innovation potential. For example, corn acreage using the new Acceleron B-360 corn inoculant is expected to ramp up significantly over the coming years, and the recently launched Balancius for poultry feed efficiency has a market potential of EUR 60 million-80 million in sales.
Novozymes is a biotechnology company based in Denmark. Co.'s business operations are centered on the development of industrial enzymes, microorganisms, and biopharmaceutical ingredients. Co. provides business-to-business biological solutions used in the production of numerous products such as biofuel, detergents, feed, and crops. Co.'s business operations are organized along two segments: the Enzyme Business which is divided into four areas, providing industrial enzymes for household care, food & beverages, bioenergy, and feed & other technical; and the BioBusiness which is home to Co.'s microorganisms and biopharmaceutical ingredients.
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