Focusing On Taste, Texture, And Health Will Strengthen Future Prospects

Key Takeaways

• The merger of DSM and Firmenich focuses on high-growth segments, enhancing revenue through synergies and achieving significant earnings improvements.
  
• Divesting non-core assets sharpens the focus on consumer-centered businesses, improving revenue, cash flow, and aligning with health-conscious demand trends.
  
• Execution risks in merger integration, price volatility in Animal Nutrition, and strategic divestments could impact DSM-Firmenich's revenue growth and profit margins.

Catalysts

Provides solutions for nutrition, health, and beauty businesses in the Switzerland, Netherlands, rest of Europe, the Middle East and Africa, North America, Latin America, China, and rest of Asia.

• The strategic merger of DSM and Firmenich has created a streamlined, consumer-oriented company focusing on high-growth, high-margin segments like Taste, Texture & Health, which is expected to enhance revenue both through top-line synergies and cost efficiencies. The expectation is that these factors will improve overall earnings.
  
• The company is delivering on its synergy targets, with €350 million EBITDA synergies to be realized by 2025. Half of these are from cost synergies and the other half from top line synergies, which are gaining momentum. This is expected to positively impact net margins and earnings.
  
• DSM-Firmenich's divestiture of non-core assets, including the anticipated sale of Animal Nutrition & Health, aims to sharpen focus on consumer-centered businesses while unlocking capital. This streamlining of operations is expected to support revenue and cash flow improvements.
  
• Growth in the company's innovation pipeline, fueled by trends toward preventative healthcare and healthier food options, positions DSM-Firmenich for sustained revenue growth. The focus on innovative solutions aligns with increasing consumer demand for health-conscious products, enhancing future revenue potential.
  
• The company's commitment to sustainability, backed by scientifically validated climate targets, along with strong employee engagement, supports long-term sustainable growth. These initiatives could improve brand value and operational efficiencies, likely benefiting margins and earnings.

DSM-Firmenich Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DSM-Firmenich's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 7.7% in 3 years time.
• Analysts expect earnings to reach €1.1 billion (and earnings per share of €4.05) by about February 2028, up from €250.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.5 billion in earnings, and the most bearish expecting €740.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.2x on those 2028 earnings, down from 106.7x 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 decline by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.83%, as per the Simply Wall St company report.

DSM-Firmenich Future Earnings Per Share Growth

Risks

• The integration of DSM-Firmenich following the merger involves significant execution risks, especially in realizing the top-line synergies, which could impact revenue growth if not managed effectively.
  
• There is a challenge in maintaining growth momentum in the Animal Nutrition & Health segment due to vitamin price volatility and potential impacts on sales volume, which risks affecting overall revenue stability.
  
• The company is undergoing divestments and portfolio tuning, such as the sale of its Feed Enzymes Alliance and other assets. Though strategically planned, these moves could lead to short-term revenue and profitability impacts if not executed at favorable valuations.
  
• The reliance on consistent organic sales growth amidst changing economic conditions and the challenge of substantial anticipated synergies exposes the company to risks of underperformance in earnings if these growth targets are not met.
  
• Frequent adjustments to product pricing in response to input cost inflation, especially in natural ingredients, could pressure profit margins if the company cannot pass these costs onto consumers as expected.

Valuation

• The analysts have a consensus price target of €127.656 for DSM-Firmenich 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 €146.0, and the most bearish reporting a price target of just €88.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €14.2 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 36.2x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of €101.1, the analyst price target of €127.66 is 20.8% 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.