KDSKF - Royal DSM 2022 Results: Better Than Feared

Summary

• Results for 2022 were mixed, and Q4 in particular was difficult for the company. Still, the results were better than we feared they could be given the headwinds.
• The company has demonstrated pricing power, which helped offset some of the negative inflationary impacts, but this had an adverse effect on volumes.
• The dividend for 2022 should total €2.53, slightly higher than the €2.5 of the previous year. We believe there is potential for the dividend to move higher in the future.

Royal DSM ( KDSKF ) has been battling significantly higher energy and raw material costs, but at the same time it is showing its pricing power, as it has been able to offset much of this cost pressure through higher pricing. As a result, its 2022 results were better than we feared, and the company was able to deliver very decent performance despite the headwinds. Importantly, the company also confirmed its mid-term targets for the business based on the strong secular long-term tailwinds and the innovation pipeline that should help maintain a good growth rate.

Shareholders approved the merger with Firmenich, and the combination is therefore entering the final stages. The company also completed the sale of DSM Protective Materials, which generated €1.4 billion in proceeds, and which helped bring net debt down to only €87 million. This net debt position is temporary, as the company will be taking on significant debt related to the Firmenich acquisition. Royal DSM is also scheduled to close soon the sale of the Engineering Materials business, and expects to receive about €3.5 billion net in cash.

Results for 2022 reflect the strong pricing actions taken by the company, but also resilient growth as organic growth remained robust. In 2022 Health, Nutrition & Bio-science saw sales increase 16% to €8.3 billion, of which 8% was organic growth. It is important to mention that most of the organic growth was the result of price/mix, with volume growth contributing only ~1%. Volumes were particularly weak in Q4, at roughly -3%. Margins also suffered as a result of supply chain and inflationary pressures, resulting in Adjusted EBITDA increasing only ~2% for the year, and decreasing ~11% in Q4 y/y. Looking at the different segments, Food & Beverages had the strongest growth performance with organic sales up 10%, followed by Health Nutrition & Care with organic sales increasing 9%, and Animal Nutrition & Health delivering organic sales growth of only 6%. Net profit was very high at €1.7 billion, but this includes the gain from selling the DSM Protective Materials business. The company's adjusted EBITDA margin declined to ~16.6% from ~19% in the previous year, and adjusted net profit came in at €555 million.

Financials

In 2022 working capital increased as a result of higher inventory levels and supply chain issues. Combined with capital employed being inflated by foreign exchange effects, this resulted in a negative 100bps impact to the return on capital employed. Still, this remains a very attractive business, in our opinion, with solid EBITDA margins and very decent ROCE. Once the headwinds dissipate, we expect both to move higher again.

Dividend

Royal DSM paid an interim dividend of €0.93 for 2022, and expects to pay another €1.6 per share after the merger with Firmenich completes. This would bring the total 2022 dividend to €2.53, slightly higher than the €2.5 of the previous year. At current prices, that represents a dividend yield of ~2.1%. It will be very interesting to see where the dividend is set at next year after the combination with Firmenich. The company has said that it expects the dividend payout ratio of the merged company to be roughly 40-60% of adjusted earnings. This could potentially mean a higher dividend for investors, but it is too early to tell where the dividend will be set post-merger.

Guidance

The company will provide guidance after the merger with Firmenich is completed. We view this as very reasonable, as it is currently difficult to tell exactly how the financials for the new company will look like, and how the business plan will be updated. The company did say during their earnings call that they expect similar conditions in Q1 as those seen in Q4 for DSM, with EBITDA being impacted by continued price cost gap, lower vitamin prices, and the effects of inventory reductions.

Valuation

The valuation has not changed much since our last article , where we estimated that once shares are issued for Firmenich the enterprise value should increase to more than €35 billion. Ignoring synergies that would result in an EV/Adjusted EBITDA multiple of more than 16x. With synergies, the valuation multiple should go down to approximately 14x. These are very rough estimates, as it is difficult to tell how the financials will look like once the company completes the merger with Firmenich, and after the dispositions of DSM Performance Materials and DSM Engineering Materials. The valuation picture will also become a lot clearer once the company provides 2023 guidance. Based on Q4 and 2022 results, and the lack of 2023 guidance, we are updating our rating to 'Hold' from 'Buy' previously, and plan to revisit it once the company provides guidance for the full year.

Risks

There are several risks worth considering for Royal DSM shareholders, including the impacts of supply chain issues and high inflation. There is also the risk that there might be integration issues when the company merges with Firmenich. These could go from company culture issues, to expected synergies proving elusive.

Conclusion

The results for 2022 were mixed, and Q4 in particular was difficult for the business. Still, the company has demonstrated pricing power, which helped offset some of the negative inflationary impacts, but this had an adverse effect on volumes. While shares are not cheap, we continue to believe this is a high quality business. Right now it is particularly difficult to evaluate the company given that it is about to complete a transformational merger with Firmenich. We plan on providing an update once the company shares more information on the updated business plan, and 2023 guidance.

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