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By Aaron Gray-Block
AMSTERDAM, Dec 23 (Reuters) - Dutch group DSM (DSMN.AS), the world’s largest vitamins maker, agreed this week to buy U.S. baby food ingredients maker Martek Biosciences Corp MATK.O for $1.1 billion, sending its shares to an all-time high.
Analysts welcomed the deal, saying DSM had not overpaid.
Several raised their price targets, noting DSM’s transformation from a bulk chemicals company into a specialist nutrition company. There are now 15 analysts with a “buy” or “outperform” rating on DSM and 10 “hold” or “sell” ratings.
One Martek analyst also said the U.S. company has recently agreed price cuts on its products, making it hard to value the business. So is now the right time to buy DSM shares?
DSM shares, at 13 times estimated earnings, are still valued on a par with traditional chemicals companies such as BASF (BASFn.DE), and do not yet reflect the higher valuations given to food-related companies such as Danish food ingredients and enzymes maker Danisco DCO.CO, which trades at 17.5 times.
Nomura analyst Jennifer Barker said the Martek acquisition completes a trio of deals for DSM this month, “removing the last obstacles to the re-rating DSM deserves.”
Barker, who rates DSM “buy,” said after the flurry of deals and divestments, DSM has improved the quality of its portfolio away from highly cyclical and base chemical activities with a net cash outflow of just 280 million euros.
She added that at its current share price, DSM is valued on an EV/EBITDA proforma 2011 multiple of 6.7, representing a “severe undervaluation” to Nomura’s price target of 53 euros.
Citigroup’s Andrew Benson was one of several analysts who raised their price targets for DSM after the deal, alongside Barclays Capital, KBC Securities and UniCredit.
Benson, who kept DSM at a “buy”, increased his 2011 and 2012 EPS forecasts by 5 percent and 9 percent respectively, and raised his price target to 47 euros from 42 euros.
Benson also noted that acquiring Martek would be earnings-per-share accretive for DSM by 20-25 euro cents if amortisation was stripped out, higher than DSM’s estimate of 15-20 cents.
According to the latest Thomson Reuters Starmine data, the mean price target among analysts for DSM’s shares is 43.90 euros, slightly higher than the Wednesday closing price of 42.31. The stock has risen 41 percent since its year low in May.
Despite calling DSM’s acquisition of Martek a “Christmas present,” Berenberg Bank analyst Jaideep Pandya also warned that DSM shares have had a strong run lately, leaving them now with “little upside.”
UBS analysts also warned that although DSM’s key nutrition business, which makes basic vitamins, has been highly profitable since 2009, its high margins could soon be at risk due to additional supply coming on to the market from China and India.
“Vitamin prices have recently been under pressure - we believe this to be supply driven,” UBS analysts said, adding that there are “significant downside risks” to the business.
UBS also said it was cautious on a continued recovery of earnings next year at DSM’s material sciences business, which includes its performance plastics and synthetic fibres products, raising concerns of a slowdown in demand.
“Material sciences look to be at the ‘top of the cycle’ but emerging market growth may surprise on the upside,” UBS said. (Editing by David Cowell) ($1 = 0.7605 euro)