Enzyme Biosolutions And Preventive Health Trends Will Drive Long-Term Expansion

Catalysts

About Novozymes

Novozymes develops and manufactures enzyme based and microbial biosolutions that improve productivity, sustainability and health outcomes for customers across food, household care, agriculture and industrial markets.

What are the underlying business or industry changes driving this perspective?

• Accelerating demand for low energy, low chemical cleaning solutions in both developed and emerging markets, supported by regulation on microplastics and consumer preference for cold and quick wash, should drive premium Household Care volumes and sustained price mix, supporting revenue growth and EBITDA margins.
• Rising global consumption of high protein and functional foods, including yogurt, cheese and advanced whey applications, combined with ongoing conversion to DVS cultures, positions Novozymes to expand share of wallet at major dairy customers and lift organic sales growth and gross margins.
• Structural growth in bioenergy from higher blend mandates, new second generation ethanol and biodiesel capacity in India, Latin America and Europe, and technology driven efficiency gains in existing plants should support high single digit growth in Agriculture, Energy & Tech and underpin cash flow and earnings expansion.
• Global focus on preventive health, premium infant nutrition and targeted dietary supplements, including HMOs and advanced protein solutions, is likely to fuel volume growth and mix upgrades in Human Health Biosolutions, expanding divisional revenue and gradually improving divisional EBITDA margins as scale builds.
• Strategic build out of commercial and technical presence in high growth emerging markets, combined with a robust innovation pipeline and cross selling synergies from acquisitions such as Feed Enzyme Alliance, should sustain above market volume growth, support the 6% to 9% long term organic growth ambition and enhance earnings resilience.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Novozymes's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 18.9% in 3 years time.
• Analysts expect earnings to reach €954.9 million (and earnings per share of €2.04) by about December 2028, up from €547.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.2 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 44.6x on those 2028 earnings, down from 44.8x today. This future PE is greater than the current PE for the GB Chemicals industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.62%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Currency headwinds could persist or worsen, and with adjusted EBITDA fully exposed to FX while hedging gains and losses are booked below EBIT, any continued euro strength against key trading currencies could erode operating profitability and slow earnings growth.
• Growth in Household Care and Food & Beverages is currently heavily volume driven with only around 1% annual pricing, so if end market demand normalizes or weakens in developed markets or if customers resist higher prices despite tariffs and input cost volatility, revenue growth and operating margins could both come under pressure.
• The strategy depends on heavy investment and rapid expansion in emerging markets. Rising regional competition and potential local economic or regulatory disruptions in India, China, Latin America and other key countries could limit market share gains and dampen long term revenue growth and EBITDA margins.
• Structural challenges in weaker categories such as Beverages, and the risk that high current Dairy and bioenergy growth includes temporary timing or preloading effects, could lead to a slowdown as adoption matures. This could reduce the sustainability of high single digit organic growth and weigh on future earnings.
• Capital intensive initiatives such as scaling Human Health biosolutions including HMOs, ramping second generation ethanol and biodiesel, and implementing a new global ERP system could run over budget or fail to reach expected scale, increasing operating costs and capital expenditure and constraining free cash flow and net profit growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of DKK471.06 for Novozymes based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK560.0, and the most bearish reporting a price target of just DKK380.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €5.0 billion, earnings will come to €954.9 million, and it would be trading on a PE ratio of 44.6x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of DKK393.0, the analyst price target of DKK471.06 is 16.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.