Company update

Buy

«Dieser Inhalt ist nur auf Englisch verfügbar – This content is available in English only»

This morning news broke that the two Danish large caps Novozymes and Chr. Hansen have entered into an agreement to merge. Chr. Hansen is also a specialty ingredient supplier, however, unlike Novozymes, develops and produces microbial solutions for the food and beverages, nutritional, pharmaceutical and agricultural industries. These solutions typically define and differentiate end products, support health and well-being, increase productivity and yield, extend shelf life and increase food safety, reduce antibiotic usage as well as offer alternatives to chemicals.

The strategic rationale to create a leading global biosolution powerhouse is based on the complementary strengths of each business, tailwinds from global megatrends and industry tailwinds, strong innovation capabilities to unlock further growth opportunities and shared Danish heritage. The newly create company, which will continue through Novozymes, will operate in an array of attractive and sizable addressable markets (>40% market shares) with a strong angle to sustainability. 

Novozymes estimates that the current addressable market for biological solutions to be around EUR 15 billion and growing and according to the World Economic Forum the economic impact of these solutions is expected to triple by 2040 driven by growing needs and demands from a growing population. The new group will have a network of 38 R&D and application centers as well as 23 manufacturing sites and paired with broad product offering, strong patent positions, enhanced operations, innovation and commercial excellence as well as an expanding customer base should translate into long-term organic revenue growth. It is expected to around 10-11% of combined sales will be reinvested into R&D annually.

After the closing of the deal the combined group will have annual revenues of EUR 3.5 billion (Novozymes EUR 2.3 billion), an Ebitda margin of 35% (Novozymes 34%) and an Ebit margin of 26% (Novozymes 26%). According to the press release the goal is to achieve annual revenue synergies of EUR 200 million (cross-selling and expanding costumer base) with EUR 80 to 90 million Ebit impact within four years. On top of that it is estimates to generate 80 to 90 million in cost synergies within three years with 40 to 50% stemming from cost of goods sold synergies and 50 to 60% from selling, general and administrative expenses. The total cost of integration is expected to reach EUR 250 million through 2026.

Going forward the expected organic revenue growth is seen between 6 to 8% annually until 2025 with an expected Ebit margin of 29% by 2025 (excl. integration and PPA). Beyond 2025 the ambition is to continue accelerated growth from new and derisked innovation and growth opportunities. EPS (excl. integration and PPA) is expected to be mid-single-digit percentage accretive in the third year after completion. 

The leverage (Nibd to Ebitda) at completion is expected to be at 1.3x to 1.7x, which is also the expected future net debt level. The historical shareholder dividend payout ratio of around 50% is expected to be maintained. 

The deal structure is laid out as follows: Chr. Hansen shareholder will receive 1.5326 new shares in Novozymes for each share corresponding to a premium of 49% to Friday's closing price of Chr. Hansen. This would value Chr. Hansen at DKK 660.55 per share. Novo Holdings, which is the largest shareholder in both companies, has provided irrevocable support for the merger – hence, Novozymes free float shareholders are set to own in aggregate 44%, Chr. Hanse shareholders in aggregate 34% and Novo Holdings in aggregate 22%. Closing is expected between Q4/23 and Q1/24.

The current CEO of Novozymes, Esther Baiget, is set to lead the newly create company post-merger.

From a purely strategic perspective the deal totally makes sense, as the portfolios are complementary. The quality of Chr. Hansen's microbiology assets is outstanding and like Novozyme's assets offer high margins. However, we believe that Chr. Hansen's growth issues have been one of the main reasons why this deal was actually possible to achieve. Nevertheles, the long-term outlook for the combined group is excellent and continued top-line and operating margin potential should warrant high, if not the highest margins, in the ingredient space. Seeing Novozymes shares being down today by approximately 10% comes not as a surprise to us, since the premium for Chr. Hansen appears hefty. We see little execution risk and believe that the deal will not be blocked by competition authorities. Bottom line – at the first glance we remain buyers in Novozymes and believe that the newly created company will become the leading powerhouse in the field of biosolutions. 

We reiterate our buy recommendation.

Valuation

Novozymes currently trades at 29.9x P/E 23E, below its 5-year historical average of 31.4x and above the MSCI Nordic Materials Index (15.1x). On an EV/EBITDA basis, the stock is trading at 18.2x, below its 5-year average of 20x and above the MSCI Nordic Materials Index (8.8x).                  

VP Bank Sustainability Score

Excellent

VP Bank Sustainability Score

5

ESG Score

3

ESG-Momentum

5

Business practices

3

Business activity

4

SDG/Impact Score

Responsible for this content

VP Bank AG
CIO Office — Group Equity & Bond Selection
Aeulestrasse 6, 9490 Vaduz, Liechtenstein
T +423 235 63 99; cio-office@vpbank.com

Prices per previous day close. Sources for charts and stats:, Bloomberg, VP Bank
Selected Information ©2022 MSCI ESG Research LLC. Reproduced by permission.

VP Bank Sustainability methodology

	VP Bank Sustainability Score: Our overall score expresses a comprehensive assessment of a company's sustainability. It is composed of the ESG rating, momentum, business practices and activities. The scale ranges from “insufficient”, "below average", “average”, “good”, "very good" to "excellent".
	ESG rating: The ESG rating reflects how sustainable a company is in terms of environmental, social and governance criteria. The indicators may vary depending on the industry. The scale ranges from -1 ("insufficient") to 5 ("excellent").
	Momentum: The momentum indicator measures the extent to which the ESG rating of a company has changed. The scale ranges from 1 ("below average") to 5 ("excellent").
	Business practices: The business practices of a company are analysed and checked whether it is in breach of international standards. Exemplary companies receive a high score, while misdemeanours lead to a low score depending on the severity of the breach. Serious violations lead to exclusion. The scale ranges from -1 ("questionable") to 5 ("exemplary").
	Business activities: This value scores the business areas in which a company is active. Activities which we consider "critical" are excluded, while borderline and questionable areas receive a deduction. Activities that are not "critical" receive a positive assessment. The scale ranges from -1 ("insufficient") to 5 ("excellent").
	SDG and Impact Score: This value compares a company's products and activities or dedicated impact solutions with the UN's 17 Sustainable Development Goals (SDGs) and measures the extent to which they contribute to or contradict the achievement of the goals. The scale ranges from 1 ("below average") to 5 ("excellent").

A detailed explanation of our methodology can be found here: www.vpbank.com/sustainabilityscore

Important legal information

This document was produced by VP Bank AG (hereinafter: the Bank) and distributed by the companies of VP Bank Group.  This documentation is for information purposes only and does not constitute an offer or an invitation to buy or sell financial instruments. The recommendations, assessments and statements it contains represent the personal opinions of the VP Bank AG analyst concerned as at the publication date stated in the document and may be changed at any time without advance notice. This document is based on information derived from sources that are believed to be reliable. Although the utmost care has been taken in producing this document and the assessments it contains, no warranty or guarantee can be given that its contents are entirely accurate and complete. In particular, the information in this document may not include all relevant information regarding the financial instruments referred to herein or their issuers. Past performance is not indicative of future results. 

Additional important information on the risks associated with the financial instruments described in this document, on the characteristics of VP Bank Group, on the treatment of conflicts of interest in connection with these financial instruments and on the distribution of this document by the companies of the VP Bank Group can be found at https://www.vpbank.com/en/legal_notice

Liechtenstein: VP Bank AG, 9490 Vaduz  · info@vpbank.com
Schweiz: VP Bank (Schweiz) AG, 8001 Zurich · info.ch@vpbank.com
Luxembourg: VP Bank (Luxembourg) SA, 2540 Luxembourg · info.lu@vpbank.com
Singapore: VP Bank Ltd Singapore Branch, 018960 Singapore · info.sg@vpbank.com
British Virgin Islands: VP Bank (BVI) Ltd, Tortola VG1110 · info.bvi@vpbank.com