DSM: ingredients group captures bitter flavour of the times

A company acronym invites hostile interpretation. DSM supposedly stands for Doing Something Meaningful. It could equally mean Down Some More. The Dutch-Swiss ingredients and bioscience group just lowered its profit projection for the year. It is struggling to pass on energy and raw material price rises, a common predicament for wholesale suppliers.

The share price tells the story. The stock has been moving in parallel with the Dutch stock market, but with much greater amplitude. That is typical of a mature business with unspectacular margins and a fair degree of operational gearing.

The market appears to be one jump ahead of the company. DSM now expects adjusted ebitda to increase by a low single-digit rate, rather than the high single-digit rate previously forecast. The figure rose 6 per cent in the first nine months compared with a year before. It edged up just 3 per cent in the three months to September.

DSM hopes to raise returns by taking over Swiss flavouring and fragrance specialist Firmenich in a €19bn deal announced in May. The transaction should bring cost savings and strengthen DSM’s operations.

The takeover is fairly priced and has a good strategic rationale. DSM may not be able to complete and integrate the purchase before the European economy is deep into its downturn, however.

DSM in theory has defensive qualities because it contributes to products that are essential rather than discretionary. Food and healthcare will remain in demand. The difficulty is that many of DSM’s business customers have the buying power to hold down prices.

The company is meanwhile exposed to international commodity prices it has little ability to restrict. That means something has to give, presumably DSM’s overheads or margins.

The group’s shares trade on a ratio of enterprise value to ebitda of about 11 times. This is in line with its peers. DSM says it has plenty of experience of dealing with rapidly changing economics. So does everybody else in the wake of the pandemic. That leaves the shares as a geared play on the economy of Europe with a dash of Asia and North America thrown in.