EUR 850.00 For Business Accounts Only

Morningstar | Nutrition Powers Ahead for Koninklijke DSM in 3Q but Materials Outlook Uncertain; Shares Overvalued

No-moat Koninklijke DSM reported third-quarter EBITDA of EUR 406 million, up 11% over 2017 or 7% excluding the temporary vitamin effect. Results were broadly in line with our view and consensus. Trends remain positive in nutrition, while the materials segment appears to be softening with volumes declining 2% in the quarter. We don’t expect to make a material change to our EUR 66 fair value estimate. At current levels, the shares remain overvalued.

In the nutrition business, around EUR 15 million in abnormal profits were recorded due to the BASF citral force majeure. This should be the final quarter where this issue has an impact. In any case, the underlying business continued to deliver robust results with EBITDA up 10% over 2017 and a 90 basis point increase in the EBITDA margin. Volumes were up 3% despite a tough prior-year comparable and would have been higher if not for some one-off issues in animal nutrition. In particular, the residual effects from the Brazilian trucker’s strike and a temporary shutdown at its Pecem plant in the Tortuga business.

The materials business reported a decent third quarter, but the outlook is growing increasingly uncertain. This is the first quarter of negative volume growth we have seen since the fourth quarter of 2015. Demand from the automotive sector in China and Europe were highlighted, similar to competitors that have already reported results this quarter. European weakness is likely temporary as it is related to the new emissions standards that came into effect. China is more uncertain, but there is talk of the government reducing taxes on auto sales to stimulate demand. DSM once again called out the slow-down in European building and construction markets as having a negative impact on its resins business. Indeed, this was the most important factor leading to the decline in segment volumes in the quarter.