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Chalk and cheese

14 Sep 2021 By Dasha Afanasieva

Food ingredients and chemicals to make cars lighter are not an appetising mix. It makes sense for Royal DSM to sell its materials unit, which also concocts chemicals to make industrial products easier to recycle. Focusing on its nutrition business can bring investors richer returns, provided the 31 billion euro group can cook up consistent growth.

The move has been a long time coming. Selling or listing the materials unit will leave the group run by Geraldine Matchett and Dimitri de Vreeze as a nutrition-only business, which is typically valued more highly than industrial groups, and reduce any conglomerate discount. Yet most of those gains look priced in.

Assume the materials unit, which also makes fibres used in bulletproof vests and rock-climbing ropes, sells for around 5 billion euros. That’s 12 times 2021 EBITDA of 415 million euros according to Refinitiv forecasts, in line Swiss peer Gurit. The business could appeal to rivals Clariant or Covestro, particularly if they are keen to bulk up in products with an environmental focus.

DSM’s remaining business, which spans food flavourings, nutritional supplements and animal feed additives, should generate around 1.4 billion euros in EBITDA this year, Refinitiv data shows. It could be valued at around 21 times EBITDA, in line with rival Symrise, implying an enterprise value of 29 billion euros, or 28 billion euros after taking off debt. Throw in the cash from the materials sale, and DSM should be worth 33 billion euros, around 5% higher than Monday’s close.

Matchett and de Vreeze will be hoping for a tastier result. Industry leader Givaudan trades at closer to 30 times EBITDA. At that multiple, the upside could be around 40%, according to Breakingviews calculations. DSM’s environmental focus should ensure a premium valuation. For example, it is trying to reduce the catastrophic environmental impact of growing food by tweaking animal feeds. That should help drive demand for its products and appeal to investors that favour companies with an environmental and social focus.

But Givaudan is faster-growing and more profitable. In the first half of the year, DSM’s nutrition business grew 6% organically compared to almost 8% at Givaudan, helped by its fragrance products. The Dutch group’s nutrition unit converted 21% of sales into adjusted EBITDA, compared to the Swiss rival’s 24% margin. There’s plenty to keep DSM’s two bosses busy.


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