Givaudan: Sticky Player In A Niche Industry (OTCMKTS:GVDBF)

Investment Thesis

It is quite exciting to find a niche market with several secular tailwinds and top players’ rational behavior. In my opinion, Flavors & Fragrances (F&F) is such a type of niche industry. Top 4 players consist of more than half of the market share with trends of continuing consolidation. In addition to that, the sector has substantial barriers to entry that keep protecting incumbents.

Leading player in the industry is Givaudan (OTCPK:GVDBF) (OTCPK:GVDNY), along with International Flavors & Fragrances (NYSE:IFF), Symrise (OTCPK:SYIEF), and Firmenich (private company). In my view, Givaudan is the best-managed company for long-term exposure based on its fundamentals and business model.

Heritage Over 250 Years

Givaudan is the world’s leading flavors and fragrances manufacturer with a legacy that stretches back over 250 years. Today, the Company has a leading market share and 73 production sites worldwide. It has two business divisions: Fragrances and Flavors. The Company also engages in research and development activities into perfumery raw materials, both synthetic and natural.

Industry Overview

F&F companies occupy a strong position in the value chain because their products make up only a small portion of the final product cost, but play a decisive role in the consumer’s purchasing decision. According to the Givaudan presentation, the share of F&F ingredients in customers’ COGS represents 4-6% in fine fragrances and 0.5-2% in flavors and consumer fragrances. On the other side, scent and taste largely determine the customer purchase decisions. Therefore, the F&F companies are in a sweet spot in the value chain, because they represent only a small portion of production costs, but a critical buying criteria.

Several megatrends support the organic growth of the industry. For instance, health & wellness, middle-class boom & urbanization, naturalness & sustainability, vegetarian/vegan/halal/kosher food, traceability, etc. In addition to that, the industry has a strong connection to population growth and disposable income, with little dependence on cyclical economic trends.

The total F&F market size is around USD26bn and is growing by an average of 4% per year in the long run. More than 500 companies are active worldwide, but the four largest producers have a market share of more than 50%. The F&F market is characterized worldwide by high barriers to entry (regulation, intellectual property, innovation, scale, global presence, preferred supplier lists, the complexity of supply chains, local taste preferences).

Recent Results & Outlook

Givaudan had a strong start to the year. In the first half of 2020, Givaudan recorded sales of CHF3.2bn, an increase of 4.0% on a like-for-like basis. The Fragrance division grew 4.5%, and the Flavors division grew 3.6% on a like-for-like basis. When we look deep into the top-line performance, we can see the relatively good performance of those parts of the portfolio which are not impacted by COVID-19. On the other side, Fine Fragrance, Fragrance Ingredients, and Active Beauty were down by 16.4% and 0.1% on a like-for-like basis respectively.

The Company had the right balance between mature and growth markets, with 58% of sales coming from mature and 42% of sales from growth markets. All regions were contributing to the growth on a like-for-like basis. The only market which was almost flat was India, given that the country has been heavily affected by the COVID-19 crisis.

EBITDA increased by 11.3% to CHF734m, while the underlying margin was remaining stable at 23.7%. At the bottom line, net income amounted to CHF413m or an 8.8% increase compared to the same period last year. Free cash flow was at the level of CHF178m or 5.5% of sales compared to 4.8% in 2019.

Balance sheet wise, the Company has a net debt (incl. pension obligations) of CHF5.2bn at the end of the first half of 2020. The weighted average effective interest rate for is 1.43%. The leverage range of 3.0-3.5x seems sustainable for a consumer goods company like Givaudan, given the free cash flow generation (CHF787m in 2019). But for future shareholders, the Company has already trod some of its flexibility.

Despite the higher debt than what it would be desirable, the maturity profile is quite favorable. Within the next 2-3 years, there is a need for refinancing of around CHF1.3bn.

The Company aims to outpace the market with 4-5% sales growth and free cash flow of 12-17% of sales, and both measured as an average over the five years. In 2016-2019, it grew sales by 5.1% and had a free cash flow margin of 12.5%.

Since 2014, the Company made 14 acquisitions, which contributed CHF1.5bn of annualized revenues. On the other side, the Company paid for M&A growth of CHF3.6bn. The strategy is to continue to grow through acquisitions by being opportunistic, disciplined, and diligent. Also, it is very assuring the Company is not going for size at all costs, rather opportunistic acquisitions. We can see from the list below that the Company strategically picks what best fits into its business model.


Since the Company has delivered its outlook in H1 2020, I will keep it as a proxy for the next five years in my valuation model. It isn’t straightforward to model potential acquisitions, so I will not include them in my model.

For 2020, I used lower bound estimates for revenues and FCF, while for the rest of the projection period, I used mid-bound forecasts of 4.5% for top-line growth and 14.5% for FCF. For the terminal growth rate, I used 3%, which is consistent with world economic growth. I set a discount rate at 6%, but if someone uses 5% or 7%, the intrinsic value is CHF4,797 and CHF2,109, respectively.


Putting all the pieces together, we can conclude that Givaudan is in an attractive industry with a strong tailwind. But at the same time, we can see that these companies are trading at a higher price than my model indicate.

Therefore, it would be wise to wait for a better entry point because I don’t see a margin of safety at this valuation level. Putting all pieces into perspective, the Company would be on my list, but I would wait for a better entry point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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ARK Genomic Revolution Multi-Sector ETF: An Overbought But Promising Niche Play (BATS:ARKG)

The ARK Genomic Revolution Multi-Sector ETF (BATS:ARKG) offers investors exposure to a very interesting sub-segment within the biotech space – genomics. This niche ETF was created in October 2014 and offers investors access to genomic-based companies dealing with Targeted Therapeutics, Bioinformatics, Molecular Diagnostics, Stem Cells, Agriculture Biology, and CRISPR (a family of DNA sequences). ARK has been one of the best performing risk assets YTD, outperforming both the S&P 500 and the SPDR S&P Biotech ETF (NYSEARCA:XBI).

Source: Yahoo Finance

The genomic medicine field is an emerging field within the broader biotech sector that studies the genetic makeup of people and its associated effect on health. This is a $19 billion market that is expected to grow at 14% CAGR to reach $36 billion by 2024 based on a MarketsandMarkets report. These figures were being bandied around, long before the coronavirus reached our shores, with government funding being one of the key drivers of this expanding market. In light of the coronavirus, I expect federal funding and research intensity to explode, as I feel it’s about time we transitioned away from this dated reactionary model of countering diseases and pandemics to a more proactive stance that gives us every chance of staying ahead of the curve. Going forward, I do feel that political rhetoric and support will be oriented towards emerging medical therapies such as genomics, which should see this sector grow at a CAGR figure in the late teens rather than the 14% mentioned above.

COVID-19-related anxiety should continue to buttress positive sentiment for biotechs and genomics

Subscribers of the Lead-Lag Report will recollect that over the last few weeks, I’ve been trumpeting the performances and the bearings of biotech stocks, that have significantly outperformed the broader market.

With the widespread clamor to shun lockdown restrictions and re-open the economy, both from the Davids and the Goliaths of this world, this does feel like a race against time. Given what’s at stake, investors’ interest has understandably perked up in this sector. For some context, let’s consider Gilead Sciences (NASDAQ:GILD), the first biopharma firm to secure US FDA emergency approval for its drug – remdesivir. According to the Institute for Clinical and Economic Review (ICER) – a prominent price watch-dog – you’re looking at a potential retail price of $4,460 per patient; Jefferies says that, even if this were purported to be a fanciful figure and subsidized at more than a 75% discount, you’re still looking at c.$1billion in sales from this drug alone, as the company’s target market is 1 million patients for 2020. Mind, this is less than a third of the total global coronavirus cases, at 3.58 million. My back-of-the-envelope calculations tell me that $1billion in sales, at a bear-case price point of $1,000 per patient, represents a potential swing factor of c.5% to Gilead’s annual topline. With the WHO showing some interest in the drug for wider global use, you’re looking at quite the monumental opportunity for Gilead Sciences, which I imagine hasn’t been the only biotech/biopharma entity pulling out all the stops to get something over the line.

Separately, drilling down to our specific area of interest – genomics, there have been reports on how rapid, large-scale sequencing of genomes (in a matter of hours or days) has helped contain community spread of COVID-19. When the number of virus infected cases grow, the effectiveness of contact-tracing becomes close to impossible, whereas by studying genetics, a lot of insight can be gained. Genomic players will also play a key role in helping public health and federal officials gauge the right time to relax social-distancing measures. Using genomics, authorities will be able to determine which activities are likely to spread the virus and which activities will be low-risk. All in all, I see genomics playing a fundamental and game-changing role in our altered world.

Source: Knowable Magazine

Technical analysis

Since 2017, ARKG has been on a strong bullish run from the $16 levels, forming a bullish channel in the process. Most recently, in April, we saw a very strong breakout candle, after spending the whole of 2019 consolidating within the $27-34 range (green highlighted area). While the current breakout candle will certainly whet the appetite of momentum traders, I would be particularly wary of the prospect of a false breakout, especially as this is a pattern that has been seen quite recently on the ARKG charts. From August 2017 to July 2019 (yellow highlighted area), ARKG formed a base at around the $23-30 levels. In August 2019, it then saw a strong bullish breakout candle above $30 which then ran into resistance at the channel boundary and was quickly sold into. History suggests that getting into ARKG soon after a strong monthly bullish candle rarely pays off.

Thus, I would advise potential investors to consider ARKG if and when it pulls back to the $30-34 zone. A good sign of strength would be for it to pull back and consolidate at those $30-34 levels before it looks to create new highs beyond the current highs. That is the leg I would be more inclined to ride, for any potential long trade, rather than the current upswing leg.

Source: Trading View

Historical risk-adjusted return metrics of ARKG warrant some caution

Source: Yahoo Finance

We saw on the price chart in the technical analysis section that most of the upside from this ETF has come over the last three years, from 2017 onwards. Gauging the quality of these 3-year returns, what is evident is that, while return metrics and alpha have been very strong relative to peers, this is a very volatile ETF and not one for the faint-hearted. Volatility – as measured by standard deviation – at 32, is almost twice that the category average. This volatility has had a strong impact on both the Sharpe ratio (no excess returns) and Treynor ratio (substandard excess returns per unit of risk vs the category average).


ARKG is probably not an ETF for everyone. There is no dividend yield, spreads are quite wide, fees are steep by general equity ETD standards at 0.75% (although cheaper than other biotech peers – ProShares UltraShort Nasdaq Biotechnology (NASDAQ:BIS) and ProShares Ultra Nasdaq Biotechnology (NASDAQ:BIB) which both charge 0.955) and as I’ve also highlighted above, returns tend to be generated at the cost of excess risk. Yet still, this is an exciting, high-growth space to be involved in and one that will only gain prominence in the years ahead as DNA sequencing costs become more affordable and health research spending increases.

As I highlighted to subscribers of the Lead-Lag report, I do expect volatility to remain rampant in the foreseeable future, creating new extremes. It’s highly unlikely that we see a one-dimensional linear move on either side, which also means there should be opportunities for overbought assets like ARKG to correct to more meaningful levels where the associated risk-reward is more palatable. Thus, until a pullback is seen and some base forming can be seen at $30-34 levels, I would be neutral on ARKG.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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