5 April 2017 Europe/Germany Equity Research Specialty Chemicals Symrise (SY1G.DE) Rating OUTPERFORM Price (03 Apr 17, €) 61.88 INITIATION Target price (€) 70.00 Market Cap (€ m) 8,002.5 Enterprise value (€ m) 9,285.8 You Know it Makes Scents Target price is for 12 months. ■ We initiate on Symrise with an Outperform rating and a €70 target price. Mathew Hampshire-Waugh We believe Symrise can generate 8% topline and 12% EPS CAGR (mid- 44 20 7888 0194 [email protected] term) whilst deleveraging the balance sheet by 0.2x ND/EBITDA per annum. Chris Counihan This is supported by share gains, improving pricing power and expansion of 44 20 7883 7618 non-core businesses. We believe the market is overly concerned about rising [email protected] raw materials/inventories and pressure from staples customers. Samuel Perry ■ Flavour & Fragrances market changes support the base business: See 44 20 7888 1583 Power Shift to Flavour and Fragrances. Symrise is the #4 player in the global [email protected] Flavour & Fragrances (F&F) market by revenue. We believe increasing Specialist Sales: James Brady 44 20 7888 4267 regulatory requirements, supply chain demands and supplier rationalisation [email protected] by customers will force continued consolidation of the industry. As F&F markets consolidate and customer markets fragment, this should support greater bargaining power and share gains for Symrise. ■ First-mover advantage in non-core strategy: Symrise was a first mover into F&F-adjacent industries with its expansion into Personal Care markets and the acquisitions of Diana (pet food) and Pinova (organic fragrances). We believe the company's ambition to further expand on this platform has the potential to add value through: 1) its strong Personal Care offering; 2) the business model placing Symrise as efficient asset owners (e.g. the multiple paid for the Diana acquisition has effectively decreased from 15x to 9x EBITDA post synergies in two years), and 3) the premium over cost of capital making asset expansion a key value driver. ■ Preferred play in preferred space: We prefer Symrise to Givaudan (Neutral, TP SFr2,000 based on; 1) greater valuation support (Symrise is trading on 14x 2017E EV/EBITDA vs Givaudan at 15.5x); 2) a more favourable F&F customer mix, and 3) a stronger non-core platform. ■ Key risk is H1 2017: We forecast 100bps temporary downside to margins in 2017 (H1 led) due to raw material inflation and lagged contract pricing. We forecast up to 5% risk to consensus EBIT in H1 2017. ■ Valuation: Our TP is the average of our DCF (€70) and peer multiples (€68). Share price performance Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (€ m) 2,903.2 3,086.1 3,337.6 3,609.9 EBITDA (€ m) 625.3 665.4 733.4 807.3 Adjusted net income (€ m) 272.96 292.42 341.70 385.43 CS EPS (adj.) (€) 2.10 2.25 2.63 2.97 Prev. EPS (€) ROIC (%) 9.9 10.4 10.9 11.5 P/E (adj.) (x) 29.4 27.5 23.5 20.8 P/E rel. (%) 195.6 197.6 184.5 174.2 The price relative chart measures performance against the EV/EBITDA (x) 15.1 14.0 12.7 11.5 DEUTSCHE BORSE DAX INDEX which closed at 12257.2 Dividend (12/17E, €) 0.50 Net debt/equity (12/17E,%) 66.8 on 03/04/17 Dividend yield (12/17E,%) 0.8 Net debt (12/17E, € m) 1,283.2 On 03/04/17 the spot exchange rate was €1/Eu 1.- BV/share (12/17E, €) 14.3 IC (12/17E, € m) 3,204.0 Eu.94/US$1 Free float (%) 91.6 EV/IC (12/17E, (x) 2.9 Performance 1M 3M 12M Source: Company data, Thomson Reuters, Credit Suisse estimates Absolute (%) 5.0 7.7 5.2 Relative (%) 3.1 1.9 -19.5 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 5 April 2017 Symrise (SY1G.DE) Price (03 Apr 2017): €61.88; Rating: OUTPERFORM; Target Price: €70.00; Analyst: Mathew Hampshire-Waugh Income statement (€ m) 12/16A 12/17E 12/18E 12/19E Company Background Revenue 2,903 3,086 3,338 3,610 Symrise are a global provider of fragrances, flavors, active EBITDA 625 665 733 807 ingredients and aroma chemicals as well as sensorial and nutritional Depr. & amort. (202) (215) (229) (244) solutions for the perfume, cosmetic, pharmaceutical, food, beverage EBIT 423 451 505 563 and pet food and baby food industries Net interest exp. (44) (46) (33) (33) Associates - - - - Blue/Grey Sky Scenario PBT 379 405 472 530 Income taxes (98) (104) (121) (136) Profit after tax 282 301 350 394 Minorities (9) (9) (9) (9) Preferred dividends - - - - Associates & other 0 0 0 0 Net profit 273 292 342 385 Other NPAT adjustments (20) 0 0 0 Reported net income 253 292 342 385 Cash flow (€ m) 12/16A 12/17E 12/18E 12/19E EBIT 423 451 505 563 Net interest 49 46 33 33 Cash taxes paid 98 104 121 136 Change in working capital (255) (164) (204) (226) Other cash and non-cash items 24 65 74 74 Cash flow from operations 339 501 529 581 CAPEX (166) (180) (181) (160) Free cashflow to the firm 206 357 384 453 Acquisitions - - - - Divestments 3 0 0 0 Other investment/(outflows) (148) 0 (185) (200) Cash flow from investments (311) (180) (366) (360) Net share issue/(repurchase) 0 0 0 0 Dividends paid (108) (110) (128) (149) Issuance (retirement) of debt - - - - Our Blue Sky Scenario (€) 100.00 Cashflow from financing 2 (156) (161) (182) Our blue sky scenario assumes 24% EBITDA margins, high single Changes in net cash/debt (317) 165 2 39 digit growth and an 18x EBITDA multiple. This compares to our base case scenario of 8% topline growth, 22% EBITDA margins and Net debt at start 1,131 1,448 1,283 1,281 16.6x EBITDA multiple. Change in net debt 317 (165) (2) (39) Net debt at end 1,448 1,283 1,281 1,242 Our Grey Sky Scenario (€) 45.00 Balance sheet (€ m) 12/16A 12/17E 12/18E 12/19E Our grey sky scenario assumes 20% EBITDA margins, low single Assets digit growth and a 12x EBITDA multiple. This compares to our base Total current assets 1,635 1,876 1,983 2,135 case scenario of 8% topline growth, 22% EBITDA margins and Total assets 4,753 4,957 5,202 5,471 16.6x EBITDA multiple. Liabilities Total current liabilities 1,028 1,044 1,066 1,090 Share price performance Total liabilities 3,021 3,037 3,059 3,083 Total equity and liabilities 4,753 4,957 5,202 5,471 Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg.) (mn) 130 130 130 130 CS EPS (adj.) (€) 2.10 2.25 2.63 2.97 Dividend (€) 0.50 0.50 0.50 0.50 Free cash flow per share (€) 1.59 2.75 2.96 3.49 Key ratios and valuation 12/16A 12/17E 12/18E 12/19E Growth/Margin (%) Sales growth (%) 297.3 6.3 8.2 8.2 EBIT growth (%) 278.0 6.5 12.0 11.7 Net income growth (%) 271.7 7.1 16.9 12.8 EPS growth (%) 271.7 7.1 16.9 12.8 EBITDA margin (%) 21.5 21.6 22.0 22.4 EBIT margin (%) 14.6 14.6 15.1 15.6 The price relative chart measures performance against the DEUTSCHE Pretax profit margin (%) 13.1 13.1 14.1 14.7 BORSE DAX INDEX which closed at 12257.2 on 03/04/17 Net income margin (%) 9.4 9.5 10.2 10.7 On 03/04/17 the spot exchange rate was €1/Eu 1.- Eu.94/US$1 Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) 3.3 3.0 2.8 2.6 EV/EBITDA (x) 15.1 14.0 12.7 11.5 EV/EBIT (x) 22.3 20.6 18.4 16.4 Dividend yield (%) 0.81 0.81 0.81 0.81 P/E (x) 29.4 27.5 23.5 20.8 Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) 83.6 66.8 59.8 52.0 Net debt to EBITDA (x) 2.3 1.9 1.7 1.5 Interest coverage ratio (x) 9.6 9.9 15.3 17.1 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Symrise (SY1G.DE) 2 5 April 2017 Key charts Figure 1: Industry EBITDA margin bridge – Consolidation in the F&F industry is driving better Figure 2: … which is improving returns and creating pricing & retention of efficiencies… opportunities for growth in adjacent industries… 21% 80% 12% Cash Flow Return on Invested Capital 75% 20% 11% 70% 19% 65% 10% 60% 18% 9% 55% 17% 50% 8% 7% 2003 2004 2011 2000 2001 2002 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 Top Ten as % market (rhs) F&F CFROI Staples CFROI Source: Company data, Credit Suisse research Source: Credit Suisse HOLT® Figure 3: Symrise already holds premium positions Figure 4: Further efficiencies retention, synergies in Personal Care, Pet Food and Organic Foodstuffs and portfolio action can drive higher margins for (bubble size represents 2016 revenue) Symrise… 23% IFF 22% 21% Croda 20% 19% Symrise 18% DSM Givaudan Air Liquide Evonik BASF Frutoram 17% Estimated Gross Margin Gross Estimated Clariant Ashland Solvay Elementis Stepan AkzoAAK Estimated Average Price Point ($/kg) Source: Company data, Credit Suisse Personal Care database Source: Company data, Credit Suisse estimates Figure 5: …Supporting continued growth/returns… Figure 6: ...with an undemanding valuation 120 1,000 10% Revenue CAGR 8% Revenue 25.0% 900 12% EBITDA CAGR CAGR 115 9% EBITDA 800 20.0% CAGR 110 700 105 600 15.0% 100 500 400 10.0% 95 300 EV/EBITDA EV/EBITDA Relative 90 200 5.0% 85 100 80 0 0.0% 2010 2011 2007 2008 2009 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E EBITDA RoCE (%) (EBIT, Adjusted) Symris vs Peers Average Source: Company data, Credit Suisse estimates Source: IBES consensus (EV/EBITDA relative to F&F peers – 12m fwd) Symrise (SY1G.DE) 3 5 April 2017 Table of contents Key charts 3 Investment summary 5 Earnings estimates vs consensus 10 Valuation 11 Peer multiples ........................................................................................................