Bioenergy And Biosolutions Demand Will Support Earnings Despite Regulatory And Competitive Headwinds

Catalysts

About Novozymes

Novozymes develops and manufactures enzyme and microbial biosolutions that improve industrial productivity, support health applications and enable more sustainable production across multiple end markets.

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

• Although emerging markets are delivering double-digit volume growth helped by local labs and commercial teams, intensifying regional competition and potential regulatory hurdles in key countries could slow incremental share gains and cap the pace of top line expansion and operating leverage. This may limit upside to revenue growth and EBITDA margin.
• While rising global demand for high protein foods and advanced dairy solutions is driving strong adoption of new enzymes and cultures, increasing customer concentration and the risk that recent preloading in Dairy normalizes may dampen volume momentum and constrain future pricing power. This could temper revenue growth and gross margin expansion.
• Although bioenergy demand is benefitting from higher blend rates, ethanol capacity additions and early second-generation projects in India, Brazil and Europe, policy uncertainty and feedstock volatility could delay new projects and reduce utilization. This may restrict growth in Agriculture, Energy & Tech and moderate earnings growth.
• Despite tightening rules on microplastics and chemicals in detergents that favor enzymatic cleaning and support innovation-led growth in Household Care, weaker consumer volumes in developed markets and increased low-cost alternatives in emerging markets may limit mix upgrades and slow margin accretion. This could weigh on net margins.
• While human health and HMO applications are structurally supported by growing interest in probiotics and infant nutrition, slow regulatory processes in large markets such as China and the dilutive margin profile of newer platforms may prolong the payback period on R&D and commercial investments. This may delay any acceleration in earnings per share.

Assumptions

This narrative explores a more pessimistic perspective on Novozymes compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Novozymes's revenue will grow by 6.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.2% today to 19.3% in 3 years time.
• The bearish analysts expect earnings to reach €956.4 million (and earnings per share of €1.87) 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 more bearish analyst cohort, the company would need to trade at a PE ratio of 35.9x on those 2028 earnings, down from 46.1x today. This future PE is greater than the current PE for the GB Chemicals industry at 16.3x.
• The bearish 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 5.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Stronger-than-expected secular demand for biosolutions across Food & Health and Planetary Health, combined with Novonesis' mid to high single digit organic sales growth guidance up to 2030 and current 8% organic growth, could support a structurally higher revenue trajectory and drive sustained earnings expansion.
• Ongoing mix shift toward high value platforms such as Human Health, HMOs and Advanced Protein Solutions, alongside scale benefits and synergies already lifting the adjusted EBITDA margin to 37.3%, may lead to further net margin expansion and faster earnings growth than currently implied.
• Early stage but strengthening regulatory and consumer trends such as bans on microplastics in detergents and demand for cleaner, low temperature washing formulations could accelerate Household Care adoption of enzymatic solutions, improving volumes, pricing power and net margins over time.
• Structural growth in bioenergy, including higher blend rates in India and Brazil, ramp up of second generation ethanol and biodiesel penetration, may unlock a longer runway of volume growth in Agriculture, Energy & Tech, supporting higher revenue and earnings resilience than assumed.
• Heavy and continuing investment in emerging markets, local labs and customer facing capabilities, together with still low penetration in categories such as cheese and high protein dairy in Asia, could lead to outsized volume growth and operating leverage, lifting revenue, EBITDA margin and earnings beyond a flat share price scenario.

Valuation

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

• The assumed bearish price target for Novozymes is DKK380.0, which represents up to two standard deviations below the consensus price target of DKK471.07. This valuation is based on what can be assumed as the expectations of Novozymes's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €5.0 billion, earnings will come to €956.4 million, and it would be trading on a PE ratio of 35.9x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of DKK404.8, the analyst price target of DKK380.0 is 6.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.