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DSM - Significant upside from SOTP remains

DSM - Significant upside from SOTP remains

3.7.2013 9:11

Rumours about sale of caprolactam business. Bloomberg published an article yesterday citing two unidentified persons, claiming that DSM is considering an exit from caprolactam. We remind that since the 2012 Capital Market Days (September 2012), the company has consistently said that it is looking for ways to reduce exposure to the caprolactam market, through partial sale of assets, LT supply contracts, etc. Unsurprisingly, a spokesman said on Bloomberg that the company will not react to speculation, and we got the same reaction when contacting IR. True or not, we believe an exit of the polymer intermediates cluster (caprolactam & acrylonitrile) would be good news, as it would significantly lower the cyclicality of the company and provide a strong boost to profitability (our EBITDA margin forecast for 2013 would rise from 13.5% to 14.8%).

Sum-of-the-parts model still yields a BUY.An exit from caprolactam could in our opinion also lower the ‘conglomerate’ valuation discount we still think DSM is currently getting. An updated Sum-of-the-parts valuation, which we discuss in a separate Flash note, yields a fair value of € 60 per share in our base-case scenario. Adding similar multiples for Nutrition as those in our peer group or attributing some value for the Innovation cluster beyond the price paid for the acquired Kensey Nash business would increase fair value by at least another € 10-15 per share.

2Q preview. We will issue a detailed preview flash within a few weeks, but importantly, we feel there have been no major changes in business conditions in recent months vs. the trends visible in 1Q, with the exception that organic growth in Nutrition should gradually pick up (already partly visible in 2Q), on the back of raised selling prices and more favourable economics in the animal Nutrition industry (higher meat prices and lower grain prices). On the back of consolidation effects (Tortuga) and a gradual increase in savings from the Profit Improvement Program, we expect EBITDA to increase from € 311m in 1Q13 to € 322m in 2Q13 (this compares to € 290m in 2Q12).

Our View:
Based on the upside potential we still see in our Sum-of-the-Parts model, we decide to raise our target price from € 53 to € 60 while sticking to our BUY rating.

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