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remaining Materials activities and
around 3/4 of earnings comes from
their Ingredients portfolio. Within
their Materials business, DSM produce
and sell sustainable thermoplastics,
industrial resins & coatings and a strong
fibre called Dyneema. Within their
Ingredients division, DSM sells vitamins,
ingredients and solutions for use in
human and animal nutrition. In the
company’s own words, DSM is focused
on ‘creating science-based solutions in
health, nutrition and sustainable living’.
Does this company generate
strong ROIC?
At the moment, DSM’s ROIC (return
on invested capital) is in the low-
double digit percentage range
according to our estimates. This is
an improvement from recent years,
is well above the company’s cost of
capital, but is materially lower than
the ROIC generated by a number of
our well-established ‘Compounders’
within the portfolio. In fact, we see
DSM as an ‘Improver’; a business
capable of improving its ROIC profile
over a number of years. There are
several things that should help to
drive this improvement in returns.
First, there should be some natural
operational leverage from volume
growth (costs should grow more slowly
than revenues). Second, we see the
TRUSTNET
[ JANUS HENDERSON ]
30 / 31
Glossary
EBITDA (Earnings before interest,
taxes, depreciation, and amortization):
A company’s earnings before interest,
taxes, depreciation, and amortization is
an accounting measure calculated using
a company’s earnings, before interest
expenses, taxes, depreciation, and
amortization are subtracted, as a proxy for
a company’s current operating profitability.
End markets (animal and
human nutrition) will see
demographically-driven
growth and ingredients are
an increasingly important
component of nutrition
products
movement of the company away from
the Materials business and towards
the Ingredients business as something
that should result in higher margins
and lower capital intensity. Third, we
back the current management team to
improve the efficiency of the business
over the medium term.
What are the risks to the business
and to this ROIC profile?
Inevitably, by having some exposure
to Materials, which tend to have
industrial end markets, there is some
cyclicality to the business and if there
is an economic slowdown, that could
certainly delay the improvements
being made to the business. Another
risk would be that the company
felt compelled to make a large and
expensive acquisition to speed up their
transition towards Ingredients; we
rate management very highly and see
this as a low probability risk. Finally,
within the Ingredients portfolio, DSM
has some exposure to vitamins, whose
prices are notoriously volatile; vitamin
pricing is therefore also a risk to the
return profile of the company.
Is there scope for growth?
The Ingredients business has
significant scope for structural
growth over the medium-to-
long term. End markets (animal
and human nutrition) will see
demographically-driven growth
and ingredients are an increasingly
important component of nutrition
products. You can also make the case
that large ingredients companies
with global reach will gain share
from smaller local competitors. DSM
look very well placed. In addition,
and as described above, we see
earnings growth as likely to be faster
than revenue growth due to margin
expansion.
Investment decision?
We have a long standing position in
DSM and it has contributed strongly
to performance. We remain positive
on the company’s prospects and
can see how the business has a good
chance of rerating from its current
~11 x EV/EBITDA multiple towards
that of its Ingredients peer group
(which trade at >15 x EV/EBITDA).
These are the views of the author at the time of publication and may differ from the views
of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and
indices mentioned within this article do not constitute or form part of any offer or solicitation
to buy or sell them.
Past performance is not a guide to future performance. The value of an investment and the
income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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