Morningstar | Vitamin Prices Normalise in 2Q as Expected for DSM; Underlying Trends Remain Strong
No-moat DSM reported second-quarter EBITDA of EUR 508 million, up 35% over the prior-year period. This was slightly lower than our expectations, as customers in animal nutrition held back on purchasing while the abnormally high prices in vitamin A and E normalised in the quarter. In any case, underlying business trends remained strong. Second-quarter underlying organic sales growth was 8% over 2017 with an uptick in the EBITDA margin. We may adjust our EUR 66 fair value estimate upwards slightly to account for the divestment transactions announced in the quarter for the associates, but we don’t expect the change to be material. At current levels, the shares look overvalued.DSM’s nutrition division benefited from temporary abnormal profits in its vitamin business in first-half 2018 due to the force majeure declared at BASF’s citral plant. Last quarter, we asserted that this phenomenon would run its course by the end of the second quarter. The company has now confirmed this is the case. Prices have normalised and the second half of 2018 is not expected to benefit from any further extraordinary profits. A new issue that is having an effect is the trucker strikes in Brazil, which negatively affected volumes in animal nutrition by 3% in the second quarter. This may continue to weigh on results for the rest of the year, but is not significant enough for DSM to alter its guidance.
The materials division had a solid second quarter with EBITDA up 8% over 2017. Demand from the automotive and electronics end markets remains strong, which primarily benefits the engineering plastics business. The company highlighted some potential weakness in the coatings business due to a mixed geographical demand picture. North America and Asia continued to perform well, but there is some uncertainty among coatings players regarding the strength of the European building and construction market.
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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