GROWTH_OPPORTUNITIES_BUY-2012-10-08.ppt

360,320,280,240,200,3m,3/12,deutsche bank markets research,rating buy europe switzerland,company syngenta,date 30 september 2012 company update,chemicals specialty chemicals,reuters synn.vx,bloomberg synn vx,exchange ticker vtx synn,price at 28 sep 2012 (chf) price target (chf) 52-week range (chf),351.50 400.00 351.50 - 230.00,crop update highlights strong high tech growth opportunities: buy crop update highlights strong high tech growth opportunities: buy syngentas crop update in india, focusing on two key crops rice & vegetables (18% of groups sales), provided an opportunity to highlight the many growth opportunities within these crops, notably hybrid rice. concrete examples and extensive discussions with top/local management and customers increased our confidence in the groups ability to reach its targeted c8% sales cagr to 2020. in addition, discussions with mgmt increased our comfort about current issues such as generics, gm corn licensing potential and the shorter-term outlook. at 13.8x 13e p/e, the valuation remains very attractive to us given increasingly visible strong growth potential underpinned by technology. buy we note eight key points from syngentas crop update in india 1) syngenta has raised the sales target for its eight key crops to $25bn by 2020 from its earlier target of $22bn. this implies a group sales cagr of 8.1% (2011-2020) which is higher than the c6% sales cagr forecast in our dcf. we note the 22-24% long-term ebitda margins target continues to apply to this sales objective. assuming managements sales and ebitda margins targets in our dcf could add at least chf 50 to our fair value. 2) syngenta has upgraded the 2020 target for rice to $2bn which implies a cagr of 20%. rice is the crop with the second biggest growth potential in percentage terms after sugarcane,virginie boucher-ferte research analyst (+44) 20 754-57940 tim jones research analyst (+44) 20 754-76763 martin dunwoodie, cfa research analyst (+44) 20 754-72852 price/price relative,and the third biggest growth potential in absolute terms after corn and sugarcane. 3) increasing penetration of hybrid rice in india and other south east asian countries should significantly enhance the profitability of the rice crop for syngenta, which is currently below average. 4) if successful, the devgen acquisition should significantly boost syngentas presence in hybrid,160 9/09 3/10 9/10 3/11 9/11 syngenta spi swiss performanc (rebased) performance (%) 1m,12m,rice and give the company access to rnai, a promising insect control technology. 5) syngentas $3bn 2020 sales target for vegetables implies a cagr of 7.5%. 6) this field trip also gave us the opportunity to discuss the,absolute spi swiss performance ix,5.9 1.3,9.2 8.3,43.8 19.4,short-term outlook with mgmt (we forecast q3 lc growth of c5% with +3% price and +5% vols). 7) in china, there have been c30 applications for new registrations of generic versions of fungicide azoxystrobin (amistar), syngentas largest product (c10% of group sales) following the patent expiry in 2011. local management dealing with china does not see it as a major threat for several reasons. 8) discussions with management further reinforced our confidence in a further step-up of licensing income for syngenta. valuation and risks our target is based on dcf using wacc of 8.4% (beta: 1, rfr: 4%, erp: 4.5%) and lt growth rate of 3.0%. key risks: adverse weather, delays to product launches, lower crop prices, aggressive competitive pricing and fx. forecasts and ratios,year end dec 31 db eps (usd) p/e (db eps) (x),2011a 20.15 15.5,2012e 23.11 16.2,2013e 26.83 13.9,2014e 29.75 12.6,source: deutsche bank estimates, company data _ deutsche bank ag/london all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank does and seeks to do business with companies covered in its research reports. thus, 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. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,30 september 2012 specialty chemicals syngenta,model updated:22 august 2012,fiscal year end 31-dec,2009,2010,2011,2012e,2013e,2014e,running the numbers,financial summary,europe switzerland specialty chemicals syngenta,db eps (usd) reported eps (usd) dps (usd) bvps (usd) weighted average shares (m) average market cap (usdm),16.85 14.87 6.06 69.0 94 21,448,17.22 14.99 7.07 79.8 93 23,934,20.15 17.31 8.08 81.1 92 28,940,23.11 19.81 9.09 90.4 92 34,254,26.83 25.64 10.10 103.9 90 33,803,29.75 28.94 11.11 119.8 89 33,353,reuters: synn.vx,bloomberg: synn vx,enterprise value (usdm),23,581,25,123,29,883,34,716,33,456,31,927,valuation metrics,buy,p/e (db) (x) p/e (reported) (x),13.6 15.4,14.9 17.1,15.5 18.1,16.2 18.9,13.9 14.6,12.6 12.9,price (28 sep 12) target price 52 week range market cap (m),chf 351.50 chf 400.00 chf 230.00 - 351.50 chfm 32,191 usdm 34,254,p/bv (x) fcf yield (%) dividend yield (%) ev/sales (x) ev/ebitda (x) ev/ebit (x),4.07 4.1 2.6 2.1 10.4 13.1,3.68 5.5 2.8 2.2 10.9 14.0,3.63 5.5 2.6 2.3 11.3 14.6,4.14 5.0 2.4 2.4 11.6 14.5,3.60 6.1 2.7 2.2 9.4 11.5,3.12 7.1 3.0 2.0 8.2 9.9,company profile,income statement (usdm),syngenta produces crop protection products and seeds. the company produces herbicides, insecticides and fungicides, as well as seeds for field crops, vegetables and flowers. price performance 360 320 280 240 200 160,sales revenue gross profit ebitda depreciation amortisation ebit net interest income(expense) associates/affiliates exceptionals/extraordinaries other pre-tax income/(expense) profit before tax income tax expense minorities other post-tax income/(expense) net profit db adjustments (including dilution) db net profit,10,992 5,406 2,267 462 0 1,805 -122 -3 0 0 1,680 283 3 0 1,394 186 1,580,11,641 5,775 2,302 509 0 1,793 -141 25 0 0 1,677 275 5 0 1,397 208 1,605,13,268 6,531 2,645 594 0 2,051 -165 15 0 0 1,901 301 1 0 1,599 262 1,861,14,241 7,024 3,001 612 0 2,389 -163 16 0 0 2,242 426 1 0 1,814 302 2,117,15,220 7,621 3,568 646 0 2,921 -120 17 0 0 2,818 499 1 0 2,318 107 2,425,16,102 8,143 3,901 675 0 3,226 -94 17 0 0 3,149 567 1 0 2,581 72 2,653,sep 09 mar 10 sep 10 mar 11 sep 11 mar 12,cash flow (usdm),margin trends 26 24 22 20 18 16 14,syngenta spi swiss performance ix (rebased),cash flow from operations net capex free cash flow equity raised/(bought back) dividends paid net inc/(dec) in borrowings other investing/financing cash flows net cash flow change in working capital balance sheet (usdm),1,538 -652 886 -79 -494 0 -229 84 -156,1,704 -396 1,308 -246 -524 0 -209 329 125,2,059 -479 1,580 -377 -706 0 -159 338 -50,2,212 -513 1,699 -200 -743 0 -277 480 -154,2,594 -548 2,046 -300 -828 0 -108 811 -304,2,937 -580 2,358 -300 -908 0 -71 1,079 -263,09,10,11,12e,13e,14e,cash and other liquid assets,1,552,1,967,1,666,1,666,1,666,1,666,ebitda margin growth & profitability 15 10 5 0 -5 -10,ebit margin,30 25 20 15 10 5 0,tangible fixed assets goodwill/intangible assets associates/investments other assets total assets interest bearing debt other liabilities total liabilities shareholders equity minorities total shareholders equity,2,738 3,102 648 8,089 16,129 3,808 5,834 9,642 6,473 14 6,487,2,964 3,087 694 8,573 17,285 3,778 6,058 9,836 7,439 10 7,449,3,025 2,869 667 9,014 17,241 3,117 6,621 9,738 7,494 9 7,503,3,182 2,766 667 9,350 17,631 2,637 6,705 9,342 8,280 9 8,290,3,358 2,648 667 9,807 18,146 1,826 6,921 8,747 9,390 9 9,399,3,552 2,517 667 10,193 18,596 747 7,153 7,901 10,686 10 10,695,09,10,11,12e,13e,14e,net debt,2,256,1,811,1,451,971,160,-919,sales growth (lhs),roe (rhs),key company metrics,solvency,sales growth (%) db eps growth (%),-5.4 -1.4,5.9 2.2,14.0 17.0,7.3 14.7,6.9 16.1,5.8 10.9,40 30 20 10 0 -10 -20,40 30 20 10 0,ebitda margin (%) ebit margin (%) payout ratio (%) roe (%) capex/sales (%) capex/depreciation (x) net debt/equity (%),20.6 16.4 40.8 22.6 5.9 1.4 34.8,19.8 15.4 47.2 20.1 3.4 0.8 24.3,19.9 15.5 46.7 21.4 3.6 0.8 19.3,21.1 16.8 45.9 23.0 3.6 0.8 11.7,23.4 19.2 39.4 26.2 3.6 0.8 1.7,24.2 20.0 38.4 25.7 3.6 0.9 -8.6,09,10,11,12e,13e,14e,net interest cover (x),14.8,12.7,12.4,14.7,24.3,34.2,net debt/equity (lhs) virginie boucher-ferte,net interest cover (rhs),source: company data, deutsche bank estimates,+44 20 754-57940 page 2,,deutsche bank ag/london,th,30 september 2012 specialty chemicals syngenta we note eight key points from syngentas crop update we recently attended syngentas second crop update (24-26 sept.) in india (pune and chennai regions) which focussed on rice and vegetables, two of the eight key crops accounting for 20% of groups sales, in a global context and in the context of india/rest of asia. the event was attended by syngentas top management including ceo/coo/head of seeds r&d alongside regional heads and rice and vegetable crop heads. the trip also included informal discussions with farmers and distributors. syngenta generates approximately $350m sales (by destination) in india which amounts to approximately 2.6% of group sales, split 2/3 crop protection (cp) and 1/3 seeds. we note eight key points from this crop update and discussions with syngentas management: point 1: sales target for key crops upgraded to $25bn by 2020 syngenta has raised the sales targets for its eight key strategic crops to $25bn by 2020 from its earlier target of over $22bn. the new target implies a group sales cagr of 8.1% (2011-2020) and compares to a cagr of 8.7% achieved over the past 10 years (2002-2012e). we note the 22-24% long-term ebitda margins target continues to apply to this peak sales objective. however, our forecasts remain more conservative with a c6% sales cagr and 20% ebitda margin assumed in our dcf post 2015. reflecting managements sales and ebitda margins targets in our dcf could add at least chf 50 to our estimated fair value. the upgraded sales target further increases our confidence in syngentas long term growth story. the upgrade comes from corn (+$1.5bn), rice (+$0.5bn) and vegetables ($0.3bn). this increase is driven by an accelerating rate of innovation and strategy delivery across the company. we stress the $25bn sales target is only for the eight key crops (including sugarcane, soybean, corn, cereals, rice, vegetables, specialty crops and diverse field crops) and we believe other crops also have the potential to grow at a similar rate. the sales progression for the key crops to 2020 is expected to be broadly even with the exception of sugarcane which is expected to gain momentum from 2015 onwards with the ramp-up of plene. figure 1: syngenta sales target for eight key crops 30.0 $25bn 25.0 20.0 $12.4bn 15.0 10.0 5.0 0.0,2011,2020,vegetables,soybean,sugarcane,corn,cereals,dfc,rice,specialty crops,source: deutsche bank, syngenta,deutsche bank ag/london,page 3,30 september 2012 specialty chemicals syngenta point 2: rice sales target increased to $2.0bn by 2020 rice currently accounts for $0.5bn in sales which represents c.4% of the group sales. syngenta has upgraded the 2020 target for this crop to $2.0bn (from 1.5bn earlier) which implies a cagr of 20% for the period 2011-2020. rice is the crop which offers the second biggest growth potential in percentage terms after sugarcane and the third biggest growth potential in absolute terms after corn and sugarcane. we note asia accounts for 90% of global rice production. the two key challenges in rice production are yield (south asia and asean yields 60% below potential) and labour cost (wage costs are 45% of the total operating costs and have risen by over 70% over the last 5 years) and availability (rural exodus of the young generations, short seasons driving peaks of demand). syngentas solutions to these challenges include the following solutions which should allow syngenta to reach its $2bn sales target for rice in 2020: development of shorter duration varieties to save water. higher yields demand plentiful water however we note water costs have been increasing and quality has been declining due to pollution. in order to address this issue, syngenta has been developing shorter duration seed varieties (e.g. maturing 28 days earlier vs. a typical 120 days duration) which require less water due to the shorter growing window. it also allows farmers to harvest early and therefore be amongst the first to sell, at a better price. it also facilitates crop rotation. development of hybrid rice to improve yields (see point 3) gromore to increase yields: syngenta offers crop protection solutions at the various stages of plant growth (e.g. seedling, vegetative, reproductive and ripening) that addresses key rice productivity challenges (poor agronomy practices, suboptimal number of applications) with simple and timely advice in the language of farmers to establish and protect the crop. this is all the more important as the first two stages (seedling and vegetative) are critical to establish the yield potential. the approach results in yield benefits up to 30%. tegra addresses both the yield and labour challenges: this is syngentas certified mechanical transplanting system for rice seedlings which allows the establishment and maximisation of yield potential in the first critical 60 days. it is targeted at all the three customer segments: farms 1ha and 5ha and 10ha (rice seedlings ready to transplant). beyond the yield advantage, tegra allows to reduce labour cost as the seedlings are grown and protected with crop protection sprays by syngenta for the first 60 days and manual seedling transplant is replaced by mechanised transplant. the return on investment for the farmer is typically in a proportion of 3 to 1. whilst tegra takes care of the first critical 60 days of the plant, gromore takes over the yield protection for the remaining 60 days. the company has successfully expanded this offering beyond india to bangladesh and latin america with encouraging feedback from farmers. for medium and larger scale farms, syngenta also offers optigro, a direct seeded rice system which ensures optimum plant density, provides high quality seed, establishes the right nutrition program, residual herbicide protection and efficient water management. the solution typically costs $150/ha and yields a return on investment for the farmer of 3 to 1. risolution pro is a specialized production system (self transplanting, radio controlled helicopter) for high value markets designed to drive productivity and meet consumer quality standards. the farmer typically pays $1000/ha for the solution which yields a return on investment for the farmer of 2 to 1.,page 4,deutsche bank ag/london,30 september 2012 specialty chemicals syngenta figure 2: value creation solution: rice source: syngenta point 3: hybrid rice is a significant opportunity for syngenta in india increasing penetration of hybrid rice in india and other south east asian countries and the potential increase in syngentas market share in the hybrid rice market, should significantly enhance the profitability of the rice crop for syngenta, which is currently below average due to the low degree of technicity/hybridisation of rice vs. other crops and governments involvement: hybrid rice only accounts for 5% of the 44ha total planted area in india vs. 55- 60% of the c30ha in china. this is due to the fact that the chinese government set the development of hybrid rice as a priority in the 60s, in order to maximise yields. this has come at the expense of the quality and available rice varieties offered to the population as it is challenging to achieve both higher yield and quality at the same time in a rice hybrid. in india however population has historically been exposed to a significant number of rice varieties (c.18 varieties make up 80% of the rice consumed in india) and as a result indians draw a lot of importance to the quality and diversity of their rice which has been slowing the development of hybrids. however with existing breeding programmes from various seed companies, this should change and syngenta forecasts that by 2020, 15% of planted rice area in india should be covered by hybrid rice. we note the difference between a hybrid and conventional seed is significant, with $15/ha for a conventional seed and $55 for a hybrid. whilst syngenta is the market leader in cp for rice in india with a 13% market share, within the hybrid rice market, bayer is the market leader in india with a share of 40% followed by syngenta (15%) and devgen (15%). syngenta only started to develop rice hybrid seeds five years ago in india (a typical breeding program lasts for 7-8 years) which explains its relatively low market share vs. bayer. however this should change with the devgen acquisition (see point 4). with new hybrids currently in devgens pipeline coming to the market from 2014 onwards, syngenta believes that its market share could increase to at least 40% assuming the devgen acquisition is successful. however we stress the market share is not the main driver for syngentas rice business (and the $2bn sales target for rice excludes devgen). the key issue is to have the right hybrid for the right market and for hybrids penetration to increase. we note hybrid rice penetration is also low in other asian countries (c.5% in indonesia and philippines) and offers additional growth opportunities for syngenta.,deutsche bank ag/london,page 5,th,30 september 2012 specialty chemicals syngenta in terms of gm rice, some co