25 November 2002 17:51 [Source: ICIS news]
DSM is maintaining its Vision 2005 targets despite the clearly difficult first two years of the transformation plan.
In 2000 the company set out to shift the portfolio away from petrochemicals and towards fine and specialty chemicals promising a radical re-orientation. It has lived up to the strategy by selling the petrochemical operations to Sabic and re-investing a large proportion of the proceeds in the Roche vitamins, carotenoids and fine chemicals business. But the operating environment remains tough to say the least. The company still has a lot of work to do if it is to grow further faster and convince the markets of what it has become.
It was not surprising last week to hear chairman Peter Elverding’s cautiously optimistic outlook. At the European Chemical Industry Finance & Investment Conference he reiterated the fact that management still holds out the Euro10bn ($10bn) 2005 sales target for the group with 80% of the portfolio in specialties. Given the way the company is going, earnings by that date probably will be more stable but the target to double market capitalisation is overly ambitious.
DSM made the right move exiting petrochemicals in the way it did. Having also sold its stake in the Dutch state-controlled gas company, EBN, it had become cash rich and well able to spend Euro2.49bn on the Roche vitamins business (about six times EBITDA – earnings before interest, tax, depreciation and amortisation).
Currently, DSM has sales of about Euro6bn a year and some highly focused businesses. It expects to be a Euro8bn company next year following expected completion of the Roche deal in the first quarter.
The vitamin acquisition particularly is a challenge. It will give DSM most of the multi-specialty orientation it wants (a mixture of fine chemicals, life science products, performance materials and a few industrial chemicals) – and something like 80% of specialities in the business mix. But Elverding acknowledges that management has a job on its hands making the vitamins integration work.
He says there is significant integration and innovation potential but, of course, at this stage he can’t be specific. He expects the new business to be lifting DSM’s earnings per share from year one.
What DSM has to do quickly, he says, is complete the Roche restructuring programme and by 2005 restore margins (EBITDA to sales margins) to more than 18%.
DSM can bring its own operational skills and standards to bear on the business and probably complement the technology base with biotechnology. The cross-fertilisation of skills and know-how is where most of the growth potential lies.
DSM’s technology position is interesting and worth watching. The company has pursued high tech solutions across the portfolio, from the performance materials segment to life science products. Its investments have reflected an increasingly high tech outlook also.
The company probably hasn’t got the management capability to take on another big deal but is likely to be pursing some performance material acquisitions around the Euro100m-Euro200m mark, Elverding said last week. On a day to day basis it is investing something like 6% of sales on research and development (R&D) - a figure which masks the significantly higher spending on some businesses compared with others.
And, DSM is being astute. In 2001 it filed more biotechnology patent applications than any other European company and is waiting to see where it stands in the rankings for this year.
Currently more than 20% of sales are biotech-related but the level of patent activity suggests there is a significant shift to come.
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