Morningstar | NZYM B Updated Forecasts and Estimates from 02 Nov 2018
Wide-moat Novozymes' shares are trading off on Oct. 24, down some 6% at the time of writing, after the company reported third-quarter results. This is a bit surprising, given that third-quarter organic growth of 5% was slightly better than consensus expectations. However, we think the sell-off is likely due to the negative tone of comments regarding the fourth-quarter. Management has called out the Middle East as an area of significant weakness for the second half. While Novozymes maintained 2018 guidance for organic growth of 4%-6%, the firm expects the final number to land closer to the bottom end of the range. This is in line with our forecast for 4.2% organic growth. Hence, we don’t expect to make any material changes to our forecast or our DKK 285 fair value estimate. With this sell-off, shares are moving into fairly valued territory.The composition of organic growth may also be weighing on investors' minds. As the quarters pass in 2018, organic growth is increasingly being driven by the bioenergy segment. In the third quarter, bioenergy organic growth was 15% over 2017 and is now 14% year-to-date. However, this segment is one of the more volatile, with organic growth ranging between negative 5% and 19% over the last decade. Strong bioenergy growth this year has been somewhat counterintuitive, given the weak fundamentals of its end market, the ethanol industry. Year-to-date, ethanol production is up a mere 2%, producer margins are under pressure, and inventory levels are high. We consider increased market share to be the biggest driver of Novozymes' performance, as the company’s new products in the segment have been successful. However, we wouldn’t expect similar growth next year, given increasingly tough comparables, the aforementioned weak ethanol market fundamentals, and the potential for trade conflicts to weigh on the U.S. export market.
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.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
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