BUY OR SELL-At record highs, will DSM shares rise further?

(For more Reuters BUY OR SELL stories click on [BUYSELL/])

By Aaron Gray-Block

AMSTERDAM, Dec 23 (BestGrowthStock) – 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)

BUY OR SELL-At record highs, will DSM shares rise further?