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Summary

  • DSM is one of the most sustainable companies in the chemical sector,.
  • DSM has a growing dividend of more than 3%.
  • With a PE of 15 DSM is a buy.

Royal DSM (OTCQX:RDSMY) is a global science based company from The Netherlands active in health, nutrition and materials. DSM is one of the most sustainable companies in the chemical sector, while paying a growing dividend of more than 3% with growth potential. At a PE of 15 it is a good buy.

DSM

2013

2012

2011

2010

2009

Revenue

$13,273

$12,601

$12,686

$12,489

$10,855

Net income

$371

$397

$1,187

$725

$464

EBIT

$1,047

$876

$1,235

$1,156

$611

EBIT%

7.89%

6.95%

9.74%

9.26%

5.63%

FCF

$218

$110

$559

$948

$1,130

EPS

$4.47

$3.75

$5.05

$4.10

$2.10

Dividend

$2.28

$2.07

$2.00

$1.86

$1.66

Dividend Yield

3.31%

DSM grouped its activities in 2 business groups with 5 clusters.

(Source: Confero, based on annual reports DSM)

The Life Sciences business group has 2 clusters:

Nutrition, which offers the world's widest range of nutritional ingredients (such as vitamins). These are produced by fermentation or chemical synthesis.

Nutrition

2013

2012

2011

2010

2009

Revenue

$5,789

$5,060

$4,651

$4,147

$3,897

EBIT

$937

$846

$796

$760

$719

EBIT%

16.19%

16.72%

17.12%

18.34%

18.45%

Pharma provides custom manufacturing to the pharmaceutical industry through DSM Pharmaceutical Products and a 50% joint venture with Chinese Sinochem in DSM Sinochem Pharmaceuticals, which is the global market leader in beta-lactam anti-infectives (antibiotics).

Pharma

2013

2012

2011

2010

2009

Revenue

$254

$253

$934

$1,020

$995

EBIT

-$11

-$4

-$11

$4

$44

EBIT%

-4.35%

-1.64%

-1.18%

0.41%

4.44%

The Material Sciences business group has 2 clusters:

Performance Materials has engineering plastics, such as Dyneema, which for example are being used in armor or high strength cables. Resins for coatings, composite materials and optical fiber coatings which are being used in for example the automotive and aerospace industry.

Performance Materials

2013

2012

2011

2010

2009

Revenue

$3,789

$3,825

$3,798

$3,460

$2,516

EBIT

$255

$201

$224

$225

$94

EBIT%

6.74%

5.27%

5.89%

6.50%

3.73%

Polymer Intermediates produces raw materials for synthetic fibers and plastics.

Polymer Int.

2013

2012

2011

2010

2009

Revenue

$2,179

$2,202

$2,512

$1,929

$1,172

EBIT

$98

$134

$468

$257

$8

EBIT%

4.50%

6.08%

18.63%

13.30%

0.71%

Innovation Center facilitates DSM's strategic transition to become an intrinsically innovative organization. Innovation Center is not coupled to a business group. It also includes 3 Emerging Business Areas which focus outside the current scope of the existing business groups. These are:

  • Biomedical, which produces novel materials-based for medical device and biopharmaceutical industries for use as coatings or implantable medical devices;
  • Bio-based Products & Services for the bioconversion of feedstocks, such as biofuels or bio-based chemicals and materials;
  • Advanced Surfaces provides smart coatings and surface technologies for solar [photovoltaic] industry.

Innovation Center

2013

2012

2011

2010

Revenue

$206

$141

$83

$69

EBIT

-$73

-$87

-$95

-$88

EBIT%

-35.57%

-61.76%

-115.00%

-128.00%

STRATEGY

In 2010 DSM started the "driving focused growth" strategy with the following focus points:

  • High growth economies;
  • Innovation;
  • Sustainability;
  • Acquisitions and partnerships.

DSM is increasing its international exposure in high growth economies. In 2013 39% of revenue was generated in BRIC countries and in 2015 this should be increased to 45%. China generates 12.5% of the current revenue with $1.7B and DSM targets at $3B (22.5% of total revenue) in 2015.

Acquisitions and partnerships are an important element and DSM has invested $4B in acquisitions since 2011. For the moment DSM is consolidating acquisitions (of other companies such as Martek in 2011, Fortitech in 2012 and Tortuga in 2013) made in previous years. There are reports that DSM is in the final stages of acquiring company Aland, which is one of China's largest exporters of vitamin C.

Sustainability is also a key business driver for DSM. Royal DSM is amongst the leaders in the chemical industry sector in the Dow Jones Sustainability World Index. Since 2004 DSM has four times ranked among the very top leaders in the sector and has held the worldwide sustainability leader position in the Materials industry group (previously named Chemicals super sector) 6 times.

One of the most important elements is the Innovation Center, which has become an integrated part of the organization. The R&D developed there (in addition to the R&D performed in the other clusters) as well as the strategic importance set on future business enable DSM to adapt to a changing business environment.

CONCLUSION

DSM is a well run company which has proven itself in successfully transforming itself in its history. It is capable of adapting to changing circumstances.

DSM has a good dividend of more than 3% , which is sustainable for the long term. In 2013 DSM paid about 30% of EBIT in dividend or repurchasing of shares and over the years this varied from 25%-50% of the EBIT.

(Source: Google finance)

Recently DSM had a big drop in the stock price because the FY2013 results were published early without a clear reason. It seems there are no hidden bodies in the closet and it may have been caused by a fear of leaked results. The uncertainty of prematurely published results caused a drop of 20% in January. The stock price has bottomed and is gradually returning to a higher price level.

At a PE of 15 DSM is not an expensive stock at the moment given the good dividend and growth potential.

Source: Royal DSM: Great Dividend And Growth Potential With A Sustainability Focus