Emerging Markets And Biofuels Will Support A Stronger Long Term Outlook

Catalysts

About Novozymes

Novozymes, now part of Novonesis, develops and produces biosolutions that help customers improve productivity, efficiency, quality and sustainability across food, health, household care, agriculture and energy markets.

What are the underlying business or industry changes driving this perspective?

• Rising demand for healthier, higher protein and more nutritional foods, including yogurt and cheese, is supporting uptake of Novonesis solutions in Dairy, Baking, Meat and Plant-based categories. This can support volume growth and revenue mix over time.
• Consumer and customer focus on energy efficiency and cleaner formulations in detergents is aligning with products such as quick and cold wash solutions and Freshness platform launches. This can support Household Care volumes and help sustain adjusted EBITDA margins.
• Global moves toward higher biofuel blend rates, increased ethanol production capacity and build out of second generation ethanol and biodiesel plants in regions like Latin America, India, Brazil and Europe are creating more opportunities for Agriculture, Energy & Tech biosolutions. This can support divisional revenue and cash generation.
• Expansion in emerging markets, including more local presence, tailored solutions and higher commercial headcount growth than in developed markets, is opening access to faster growing end markets. This can support group organic sales growth and earnings.
• Customer demand for ingredient replacement, including chemicals and microplastics in detergents, and productivity improvements in food and bioenergy, is increasing the value of Novonesis enzyme and microbial platforms. This can support pricing contribution and adjusted EBITDA margins.

Assumptions

This narrative explores a more optimistic perspective on Novozymes compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Novozymes's revenue will grow by 8.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 13.2% today to 18.6% in 3 years time.
• The bullish analysts expect earnings to reach €978.7 million (and earnings per share of €2.1) by about January 2029, up from €547.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 51.7x on those 2029 earnings, up from 48.0x today. This future PE is greater than the current PE for the GB Chemicals industry at 17.8x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The group is leaning heavily on emerging markets, where organic sales growth of 12% is linked to recent investments in local commercial resources. Any slowdown in these geographies or weaker returns on this increased cost base could limit volume growth and weigh on revenue and adjusted EBITDA margins over time.
• Currency headwinds are already reducing reported sales growth by 3 percentage points and are a drag of around 1 percentage point on the adjusted EBITDA margin outlook. Prolonged FX pressure or less effective hedging could constrain reported earnings and dilute net margins even if underlying volumes remain healthy.
• The business is committing to ongoing reinvestment in commercial presence, emerging market expansion, CapEx ramp up and integration costs from acquisitions such as Feed Enzyme Alliance. If these outlays do not translate into sufficient additional volumes or pricing power, the result could be softer free cash flow and lower earnings growth than expected.
• Several growth areas, such as HMOs in China, second generation ethanol and biodiesel, and higher blend rates in biofuels, are still in early or ramp up stages. Slower regulatory approvals, customer adoption or project execution could delay the translation of these long term themes into revenue and EBITDA margin support.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Novozymes is DKK560.0, which represents up to two standard deviations above the consensus price target of DKK471.37. This valuation is based on what can be assumed as the expectations of Novozymes's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK560.0, and the most bearish reporting a price target of just DKK380.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €5.3 billion, earnings will come to €978.7 million, and it would be trading on a PE ratio of 51.7x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of DKK421.8, the analyst price target of DKK560.0 is 24.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.