Royal DSM NV’s expansion into higher-margin nutritional supplements including menopause remedies has some investors questioning the less profitable plastics, fibers and resins assets.
While demand is growing for i-cool menopause and i-flex joint supplements, sold in Walgreen Co. drugstores, earnings from caprolactam used in nylon are being squeezed by benzene prices. Asset sales are bound to follow as the Dutch company moves away from its near 100-year chemical heritage, said SNS Asset Management’s Corne van Zeijl.
“DSM still has the legacy of some traditional chemicals,” said van Zeijl, who manages $1.3 billion including DSM stock. “We expect they’ll sell this business eventually and just focus on higher-margin vitamin and nutrition markets.”
The $1 billion purchase of baby-food ingredient maker Martek Biosciences Corp in 2010 brought the Heerlen, Netherlands-based company a step closer to the consumer. DSM, which stands for Dutch State Mines, has already sold fertilizer, melamine and citric acid units, while pumping $3.1 billion into nutrition deals. Exiting materials and chemicals altogether could boost shares to 50 euros a piece, according to ABN Amro analyst Mutlu Gundogan.
DSM shares declined 0.4 percent at 44.98 euros in Amsterdam trading at 10:45 a.m., valuing the company at 8.6 billion euros ($11 billion). Over the past year, the stock has risen 2.4 percent, underperforming the 11 percent gain of the 17-member Bloomberg Europe Chemicals Index, which includes Germany’s BASF SE and Switzerland’s Clariant AG.
DSM Chief Executive Officer Feike Sijbesma, who has been a member of the managing board since 2000 and became CEO in 2007, said last week that the company benefits from having different components.
“The advantages are in technology,” the CEO said. “We’re using biotechnology in the materials field and some of the materials we’re increasingly selling in life sciences. But I have to say, there are also some businesses in our portfolio that don’t have any synergies.”
Sijbesma initially highlighted a two-prong acquisition strategy for both nutrition and materials, where caprolactam is used. In recent years, he spent most money on the nutrition segment and also has said that he’s evaluating options for merchant caprolactam.
Toothbrushes to Suits
Still, DSM, as part of a joint venture with Sinopec and Jiangsu Guoxin Group, is nearing the completion of the world’s biggest caprolactam plant in Nanjing, adding an expected 400,000 tons of annual capacity.
DSM’s caprolactam business may face significant price pressure in China because of new plants and as new rivals enter the market, the company said in its annual report. Caprolactam is a chemical that feeds into DSM’s plastics operations, including Nylon 6 used in a broad range of goods from toothbrushes to suits.
The i-cool brand -- introduced in May 2010 and recommended by organizations such as the Red Hot Mamas menopause help group -- is so far a nascent area of the growing nutrition division at DSM, which generated 3.7 billion euros in 2012. Its main focus has been supplying supplements and blends of vitamins to manufacturers, a business that yielded a margin in excess of 21 percent in 2012 compared with 10 percent in materials and 8 percent in polymer intermediates.
The nutrition division accounted for more than 70 percent of operating earnings in 2012 and generated about 40 percent of total sales, up from 30 percent in 2008 when the business overtook performance material as the biggest revenue source.
The global nutritional supplement market is predicted to swell to $107.54 billion by the end of 2015 from $86 billion in 2010, according to research by Koncept Analytics. Growth is being driven by an ageing population, rising consumer awareness of health issues and associated medical-treatment costs, and a changing lifestyle of urban populations.
Martek was one of a string of purchases by trained medical biologist Sijbesma, who created the i-health unit to bring together products developed in DSM laboratories that had no path to market via existing clients, as well as acquired consumer brands.
In a March 20 interview, Sijbesma said the i-cool brand gives insight into test how to sell products directly to consumers.
“It’s a small part of our business, but definitely interesting because it creates a connection with the end consumer, and we’re testing that,” he said. “You could compare it to sticking a toe in the water.”
While nutrition is a market where margins are attractive, it’s a market with certain risks as marketing products to consumers is more difficult than selling chemicals to other companies, said SNS Asset Management’s Van Zeijl.
“By moving towards consumers, the company will also have to deal with marketing the brand, like Heineken and Unilever. That could be complicated,” he said.
ABN analyst Gundogan said that even without a disposal of DSM’s chemical assets, the company’s nutrition business is set to become the main focus.
The company is “transforming towards a full-fledged pure play nutrition company,” he said said. “When you look at where capex and the M&A budget were spent in the past year, I’m convinced about that.”
Last year alone, DSM bought Omega 3 supplier Ocean Nutrition Canada, bespoke food-ingredient company Fortitech, and animal-nutrition company Tortuga. DSM is the world’s biggest maker of vitamins, competing in that market with BASF and Lonza Group AG.
Integrating purchases, generating organic growth and fixing the caprolactam value chain will be priorities for 2013, Markus Mayer, a Kepler analyst with a “buy” rating on DSM, said in a note after meeting with DSM management.
Peers including DuPont Co. also underwent transformations to capture demand for value-added, technology based ingredients that fall under the life sciences banner. DuPont purchased food-ingredient maker Danisco for $7.1 billion in 2011 and the company is selling commodity businesses.
Other investors such as Patrick Beijersbergen, who represents shareholder group VEB, say Sijbesma should be given the necessary time to wait for the best possible moment to sell assets.
“It would make sense DSM will in the end just focus on nutrition and vitamins and divest the materials units, so they can really invest in and focus on one particular area,” Beijersbergen said. “But divesting the materials units can only happen at the right price and the right conditions.”