Analyst Note| Rob Hales, CFA |
Koninklijke DSM, or DSM, has essentially completed its transformation to a fully focused health and nutrition company. We expect the remaining industrial materials businesses to be divested in 2022, leaving DSM with 100% of sales from health and nutrition end markets. Consequently, we are lowering our weighted average cost of capital, or WACC, to recognize DSM's lower systematic risk and upgrading our moat rating to narrow. Altogether, our refreshed analysis boosts our fair value estimate 75% to EUR 150. We are late to the party in recognizing DSM's improving fundamentals as the stock has already re-rated to a higher valuation multiple. Regrettably, DSM was the one that got away. Our EBITDA forecasts are now 4% above consensus due to our optimism around the innovation pipeline. Despite modestly aggressive forecasts versus consensus and a much lower WACC, our fair value estimate remains well below the market price and consensus target price. Hence, we think the market is using an aggressively low discount rate for DSM, similar to other defensive companies with long-duration growth outlooks.