Morningstar | DSM Raises Guidance After Strong Start in Nutrition; Shares Overvalued
No-moat DSM reported first-quarter EBITDA of EUR 424 million, a 14% increase over 2018 and ahead of expectations because of a strong performance in nutrition. Given the strong start, DSM ratcheted up 2019 guidance to high-single-digit EBITDA growth from mid- to high-single-digit EBITDA growth. Shares are up 5% intraday. We may tweak our near-term forecast upwards but don’t expect to make a material change to our EUR 69 fair value estimate. At current levels, the shares look overvalued.An improvement in the margin drove outperformance in nutrition. The first-quarter EBITDA margin was 20.8%, a 140 basis point increase over 2018. A positive business mix was cited, which we think relates to strong sales growth in human nutrition (5% organic) and food specialties/personal care/aroma ingredients (12% organic) compared with declining growth in animal nutrition (negative 2% organic). However, the nearly 21% margin may not be sustainable because one-time cost savings and currency effects contributed to the positive result. Animal nutrition is facing headwinds in China as the African swine fever intensifies. Human nutrition benefited from strong performance in i-Health, pharma, early-life nutrition, and food and beverage premix sales to local/regional customers while the dietary supplements business was solid.
Results in materials were in line with our expectations. Volumes declined sharply, down 6% over 2018 but we expect this to improve over 2019, given a tough comparison in the first half of the year. Engineering plastics reported continued softness in the automotive sector across China and Europe and in electrical/electronics across Asia. Resins continue to struggle, with soft construction markets in Europe and Asia, while the high-margin functional materials business remains solid. Dyneema continues to be positive because of high demand for personal protection. DSM expects new production lines to come online in the second half of 2019 to meet the growing demand.
Royal DSM is engaged in the creation of products and services in Life Sciences and Materials Sciences. Co.'s products and services are used globally in range of markets and applications in healthcare, pharmaceutical automotive and chemicals sectors. End markets include human and animal nutrition and health, personal care, pharmaceuticals, automotive, coatings and paint, electrics and electronics, life protection and housing. The activities of Co. are grouped into four clusters: Nutrition, Pharma, Performance Materials and Polymer Intermediates.
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