NVZMF - Novozymes: Macro Risks Must Be Weighed Against Valuation

2023-03-21 10:19:23 ET

Summary

• Exposure to large and growing markets should be supportive of Novozymes' long-term revenue growth.
• Enzymes may offer a more defendable market that supports higher margins than many specialty chemical market segments.
• Novozymes' valuation has declined significantly over the past few years, but this is likely reflective of current macro uncertainty.

Novozymes (NVZMF) is a leading European supplier of biosolutions. The past few years have seen strong revenue growth on the back of price increases, balanced by declining margins due to inflationary pressures. Novozymes has a strong competitive position and exposure to a number of growth markets, but softening end market demand is a risk in 2023. As a result, Novozymes' current valuation must be weighed against macroeconomic uncertainty and the merger with Chr. Hansen.

Market

Novozymes estimates that the addressable market for biological solutions is currently worth around 15 billion EUR and growing. While this is a large opportunity, the diversity of the market may make it difficult for any one company to build a dominant share, and Novozymes already has a strong position within this market.

Novozymes has exposure to a number of growth markets though:

• The global market for human probiotic supplements is estimated to be worth 5.4 billion EUR .
• The market for bioethanol is expected to increase at an annual rate of 13.2% from 40.8 billion USD in 2021 to 124.5 billion USD in 2030.
• The market for plant-based proteins is currently estimated to be worth 10 billion USD and growing at over 6% per annum.
• The market for Human Milk Oligosaccharides (HMOs) is expected to reach 1 billion USD by 2030.

Novozymes

Novozymes is a leading biosolutions company, with more than 6,700 employees across 33 countries, supplying customers with over 700 products. Novozymes groups its products under the following segments:

• Household Care
• Food, Beverages & Human Health
• Bioenergy
• Grain & Tech Processing
• Agriculture, Animal Health & Nutrition

Household Care

Biosolutions in the Household Care segment are used in products like fabric softeners, laundry detergents, dishwashing detergents and soaps. Novozymes' products aim to provide properties like deep-cleaning, fabric care, freshness and malodor prevention.

Biobased laundry detergents can lower the environmental impact of washing, by making low temperature washing more effective. Most laundry detergents also contain ingredients that are derived from fossil-fuels, contributing to their carbon footprint. Novozymes' products can partially replace these chemicals. Novozymes' enzymes also allow 30% less surfactants to be used compared to a standard detergent, without negatively impacting washing performance.

Food, Beverages & Human Health

Biosolutions in the Food, Beverages & Human Health segment help improve the taste and texture of plant-based foods and beverages. Novozymes' products also help reduce food waste by keeping bread fresher for longer.

Proteins can improve the taste, texture, and nutritional profile of plant-based meats. This is a focus area for Novozymes and as a result, they are investing heavily in protein production facilities. For example, Novozymes is building a facility in Blair, Nebraska to produce advanced protein solutions.

Recently introduced products include:

• Valena Pulse G - enables the use of legumes in breads while providing the experience that consumers expect.
• BioFresh Clean - enzymes used in oral care products that help consumers maintain a healthy oral microbiome.

Bioenergy

Novozymes' Bioenergy solutions are used in the production of low-carbon fuels for the transport sector. They enable better use of raw materials, while saving energy when producing bioethanol, corn oil, feed protein and biodiesel. Novozymes' products help create biofuels that have a higher octane rating and burn cleaner.

Novozymes has a facility in Blair, Nebraska that manufactures enzymes for ethanol production. The site is located within 500 miles of 60% of all ethanol producers in the US. Approximately 70% of Novozymes' Bioenergy revenue comes from North America.

The sale of enzymes for use in second-generation biofuels has been an important contributor to growth. Second-generation biofuels are derived from lignocellulosic feedstock. The lignin and cellulose of a plant are separated so that cellulose can be fermented into alcohol.

Recently launched products include:

• Innova Apex - a high-yielding yeast designed for ethanol fermentation times of 52-65 hours.
• Innova Turbo - a high-yielding yeast designed for ethanol fermentation times of <52 hours.

The bioenergy segment covers more than just ethanol production though. Novozymes also offers a broad range of solutions that enable increased by-product value. Producers are increasingly diversifying into value streams beyond ethanol, such as feed protein, corn oil or biogas, which creates a pull for biosolutions in fiber conversion.

In 2020, Novozymes and Carbios entered into a joint development agreement to produce enzymes for the recycling of PET plastics and fibers. The companies had previously entered into a similar arrangement in 2019 to produce enzymes for PLA biodegradation. Novozymes will optimize and produce Carbios' proprietary enzymes which will be used at a biological PET-recycling plant in France, which is due to start production in 2025. Processing capacity is expected to be 50,000 tonnes of waste per year.

Novozymes also uses enzymes for carbon capture and storage, replacing conventional chemicals. Carbon capture can achieve an estimated 14% of the global greenhouse gas emissions reductions needed by 2050. The biological enzyme carbonic anhydrase is used to extract CO2 from post-combustion flue gas. Enzymatic carbon capture can be more cost effective and eliminate harmful waste products. Waste heat can be used, instead of maintaining an energy intensive boiler and no special wastewater treatment system is required. Novozymes also believes that enzymatic functionalization can improve carbon capture.

Grain & Tech Processing

Recent growth in the Grain business has been driven by pricing, increased penetration in vegetable oil processing and innovation in starch. Novozymes' Tech business was roughly flat in 2022, as stronger sales of enzymes used in COVID-19 test kits was offset by weaker textile sales

Recently introduced products include:

• Fiberlife - enables textile manufacturers to produce higher quality and longer-lasting fabrics from viscose, modal and lyocell.
• Frontia Prime - enables corn starch and sweetener manufacturers to increase yields, reduce energy usage and cut CO2 emissions. One third of the corn used for producing starch globally is processed with Novozymes' Frontia solutions.

Agriculture, Animal Health & Nutrition

Novozymes' products can increase agricultural yields by improving the ability of plants and animals to absorb nutrients. They also enable food and ingredient producers to better utilize raw materials and help consumers reduce waste.

Recently introduced products include:

• Torque IF and Rachet - LCO promoters that improve yields by stimulating the nitrogen fixing process.
• HiPhorius - a phytase that releases phosphorus from animal feed, allowing farmers to reduce phosphorus use.
• Prefur Odorelief - a solution that enables biological cat litter control with an easy spray application.
• P201/P208 - are solutions that enable farmers to replace a portion of the phosphorus in synthetic fertilizers. Novozymes partnered with Anuvia Plant Nutrients to develop biobased nutrients for the agricultural industry that will reduce the need for synthetic fertilizers.

Innovation

Innovation is an important part of Novozymes' business. The company invests approximately 11% of revenue in R&D and launched 26 products in 2022. R&D could lead to a sustainable competitive advantage in the biosolutions segment, as enzymes provide a greater opportunity for continuous improvement. This may be a contributing factor to the relatively high margins achieved by enzyme companies.

Similar to a number of peers, Novozymes is focused on co-creating products with customers in the food and health space. Consumer and market insights are required to guide product innovation, and as a result this is another area of investment for Novozymes.

Chr. Hansen Acquisition

Novozymes proposed a combination with Chr. Hansen in December 2022 , with the aim of realizing growth opportunities and strengthening its competitive position. Chr. Hansen is a Danish bioscience company with a 145 year history. They develop natural ingredient solutions for end-markets like the food, nutritional, pharmaceutical, and agricultural industries.

The combined company would have generated 3.5 billion EUR revenue in 2022. Annual revenue synergies are estimated to be approximately 200 million EUR. 80-90 million EUR in cost synergies are also expected to be realized within three years of the acquisition. Novozymes expects organic revenue growth of 6-8% annually through to 2025, with 29% operating profit margins in 2025, excluding integration costs and PPA amortization.

The merger would also expand Novozymes' R&D capabilities, which will be an important component of maintaining a competitive advantage. The combined company would have a network of 38 R&D and application centers and 23 manufacturing sites, with approximately 2,000 R&D employees and over 350 million EUR invested into R&D annually (10-11% of sales).

Other Acquisitions

Novozymes acquired Microbiome Labs in 2020 for approximately 780 million DKK, which will help to build their Human Health platform. The acquisition adds a range of proprietary probiotic and microbiome solutions and provides access to Microbiome Labs' network of health practitioners. Probiotics for human use is a selected growth area for Novozymes. Microbiome Labs was expected to generate 250 million DKK revenue in 2020 with double-digit sales growth.

Financial Analysis

After a number of years of stagnation, Novozymes generated strong revenue growth in 2021 and 2022, driven in large part by higher prices. Whether growth can be maintained going forward as inflationary pressures ease will be crucial for Novozymes' stock.

Bioenergy and agriculture related business should be expected to soften in 2023, as tailwinds from 2022 are likely to turn into headwinds. It also seems likely that the F&B business will weaken over the next 12 months.

Novozymes is expecting modest growth in 2023 , with pricing expected to account for more than half of growth. Enzymatic penetration in emerging markets is expected to continue and the Freshness platform is also expected to contribute to growth. Novozymes is expecting a contraction in European and North American laundry detergent volumes, as well as trading down by consumers.

Gross margins were lower in 2022 as the result of higher input , energy and logistics costs. This was partly offset by productivity improvements and pricing. This is likely to continue into 2023 as the current spot price for many inputs is higher than Novozymes' average cost in 2022.

Valuation

Novozymes has a long-term ambition of doubling sales by 2030 . If they can realize this target, and return margins to pre-COVID levels as inflationary pressures ease, there is potential for the stock to perform well going forward.

There is a risk of deflation undermining sales growth in the next 1-2 years though, and the merger with Chr. Hansen also introduces significant execution risk. Despite these risks, Novozymes is a high quality company, and absent a recession, investors may not get a much better entry point.

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