Symrise (OTCPK:SYIEF) has many negatives. There is the risk of customer destocking, slower end-market demand and the obvious impact of higher energy and labor costs. Furthermore, there is a regulatory overhang for FY23, i.e equivalent to holding a gun to SYIEF’s head. However, based on my scenario analysis (shown below), it appears that investors have already priced in the risk of a regulatory investigation. If SYIEF can meet consensus estimates, the risk/reward ratio appears to be favorable. I recommend buying a small position that will provide exposure to this attractive risk/reward situation, while being small enough to have no impact on the overall portfolio if things go wrong.
Following the release of interim results in January, SYIEF reported FY22 earnings that fell short of consensus in terms of of EBITDA and profit. However, there was positive growth of 11.5% in the fourth quarter of 2022, which exceeded expectations due to a strong performance in Flavor and Nutrition, but Scent & Care was well below expectations. EBITDA margin was also expected to fall below consensus, according to the January release. Looking ahead to FY23, the guidance suggests that there will be growth of 5-7% on a like-for-like basis and an unchanged EBITDA margin. This is largely in line with expectations.
For those of you who are unaware, regulators are investigating a possible violation of antitrust laws in the production of fragrances and fragrance ingredients. I expect this to be a lengthy investigation, the results of which could result in fines having a significant impact on European sales (maximum 10% of global turnover). Based on the news, I expect a significant impact on SYIEF due to the fund’s 37% exposure to Europe. As this probe is expected to last several years, I don’t expect the cloud of uncertainty surrounding the stock to dissipate anytime soon. That said, as I discussed below, it appears that the market has already priced in quite a bit of impact from this news.
Management has restated its mid-term targets, which include organic sales growth of 5-7% annually and an increase in EBITDA margin to 20-23% by the end of FY25. For FY23, management guided organic growth of 5-7% with an EBITDA margin of 20% and an FCF margin of 12%.
Since the miss was already known in the January release, I think most attention was focused on guidance, which turned out to be in line with what the consensus expects. That said, guidance for normalized organic sales growth of 5-7% in FY23, driven equally by volume and pricing, was absolutely encouraging, as was management’s commentary on Q1’s improvement so far over Q4. As far as I can see, management is taking a more cautious approach with this guidance, accounting for only a moderate increase in commodity prices and a much larger increase in personnel costs compared to prior years. The ultimate impact from these two factors may be less than management expects, leading to a beat in guidance because they depend on macroeconomic developments. Additionally, management appears to be hinting at a brighter outlook for volume growth than its main rival Givaudan ( OTCPK:GVDNY ) . based on my math.
I made a simple model to depict two scenarios. Let’s first assume that the investigation found no errors and that management reached consensus numbers (which is largely a function of guidance anyway). Using consensus figures, SYIEF should generate DKK 5.5 billion. EUR in revenue and 592 million EUR in earnings in FY25; with the current multiple, it would be 16 billion. EUR worth in market value, corresponding to EUR 114 per share or an increase of 23%.
The second scenario assumes that SYIEF was found guilty as a result of the investigation. Although we don’t know the exact impact on earnings and multiples, I made the simple assumption that earnings could be impacted by 20% (10% of peak global revenue could result in a much higher earnings impact due to margin difference) and multiples could be reduced by 2x to account for any short-term volatility. The result appears to be a 10% drop from the current price.
Combined, the risk/reward appears to be 23% upside to 10% downside, which seems like a pretty good trade (2:1 ratio). And if the downside of the probe is less than I expected, the risk/reward ratio will be much better.
Although there are several negative factors impacting SYIEF, including the risk of customer destocking, slower end-market demand, and impending regulatory investigations, my scenario analysis suggests that the market has already priced in these risks to some extent. Furthermore, management’s guidance for FY23 is encouraging with normalized organic sales growth of 5-7% and a cautious approach to factor in raw material and personnel costs. Overall, I recommend buying a small position in SYIEF to take advantage of this attractive risk/reward situation, while being small enough to have no impact on the overall portfolio if things go wrong.
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