Business Description
Novozymes is a Denmark-based biotechnology company engaged in the production and sale of industrial enzymes, microorganisms and biopharmaceutical ingredients. The Household Care area comprises cleaning solutions, laundry, dishwashing and microorganism sales for cleaning solutions. The Food & Beverages manufactures enzymes for the food industry. The Bioenergy provides enzymes to the energy industry.
Sales contribution
By Business Segments
FY 2014: Household Care 35%, Food & Beverages 26%, Bioenergy 18%, Agriculture & Feed 14%, Technical & Pharma 7%
FY 2013: Household Care 36%, Food & Beverages 27%, Bioenergy 16%, Agriculture & Feed 14%, Technical & Pharma 7%
By Geography
FY 2014: EMEA 38%, North America 34%, Asia Pac 17%, Latin America 11%
FY 2013: EMEA 37%, North America 33%, Asia Pac 19%, Latin America 11%"
Company Positives
• Largest Player in the business with 48% market share
• Good cash flow business
• Strong R&D and Innovation drive in the company
• Maintained an image of eco-friendly company which cares about society
• Good disclosure norms followed
• Being in Bio-tech and Alternative fuel business it gets tax breaks from different governments
• Strong track record of organic growth
Company Negatives
• Biofuels market is politically regulated in US and sales in this industry are linked to regulatory developments. It is the major market and hence any change in blend limits and/or fuel standards can have significant impact on sales
•Stock might be expensive if 2G ethanol technology does not pick up
Industry Overview
• World market for industrial enzymes expanded by 5% in 2013 to reach approx. DKK 22bn ( $3.5bn)
• Company has approx. 48% market share of the global market
• 2nd Generation Ethanol is estimated to be 16bn gallon market by 2022 and needs 10x more enzyme per unit of ethanol
• Average Ethanol production per day is about 908k barrels per day in US
•Agrochemical crop market is worth $180bn of which agro bio-technology market is about$2.3bn growing in mid-teens
• Novozyme has global market share of 60% in household care market with around 300 customers
Competitors
• Danisco (acquired by DuPont in 2011) market share 20%, DSM market share 6%, Others 26%
Earnings Growth Driver
• Increasing global population and burgeoning middle class driving consumption
• Replacement of Chemicals to make products more bio-friendly
• Trend for healthy foods leading to less pesticides usage
• Improve wash performance, enable low-temperature washing and replace chemicals
• Demand for low CO2 emission
• Alternative energy for energy security
• Global food demand to double by 2050 but global crops yield are struggling
• Increasing need of Bioenergy
• Product innovation
• Expand addressable markets
• Improve efficiency to boost bottom line
Comments on Financials
• Highly positive cash flow business
• Short term impact on revenues in 2014-15 because of BioAg Alliance as sales get transferred to the JV
• ROIC is high
• EBIT Margin targets of 24%-26%
Valuations
• Currently not cheap but based on high organic growth targets valuation may be justified
Takeaways
- Largest player in Industrial Enzymes with 48% market share.
- Strong and long term relations with customers.
- Highly positive cash flows with strong balance sheet and net cash position.
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