Bayer AG Update
Still a potential turnaround
First of all, apologies for the almost telegraphic format of the comments. I'm working on the thesis of a Polish waste management company, Mo-Bruk, and analyzing another potential turnaround in the pharmaceutical world, which is taking up a significant amount of my time.
Substantially, the thesis published in December has not undergone significant changes. The full-year results align with the comprehensive thesis (link to original thesis), and thus, neither the valuation nor the conclusion is altered: At current prices, the market has factored in the litigation issues, and considering zero growth in the coming years, the company is undervalued.
What does appear evident is that, despite a challenging 2023, Bayer is poised for an even more difficult 2024. This will be marked by additional litigation headlines, scrutiny on the Pharma segment, a dividend cut, and the announcement of the postponement of the segment separation expected by the market. It is not out of the question to see prices dip below €26.
The guidance published by the company for 2024 is not favorable, and the company is focusing on generating cash flows to address debt payments. This approach makes sense.
It's worth noting that Bayer's reported Free Cash Flow already accounts for the payment of debt interest. In this context, we can observe the impact of litigation payments.
Regarding financial debt: Has increased, rising from 36.6 billion euros to 40.8 billion euros. The cost of debt remains around 4%. In 2024, the company faces the maturity of approximately 3.7 billion. The yield on its bonds in the open market has been steady as the agency ratings, prepared for the potential need for refinancing:
The evolution of net debt and its causes can be clearly seen in the graph published yesterday during the Capital Markets Day. It is evident that the dividend reduction makes sense as a strategy to decrease debt.
Not much more to add. Regarding the evolution of the segments:
Crop Science
The dynamics of Crop Science continue to be impacted by glyphosate, with 7.5% decline in sales, primarily attributed to glyphosate prices. The remaining product families, referred to by Bayer as Core, have seen a growth of 7%. The sales downturn is a prevailing trend in the sector; in this regard, FMC reports a -23%, and Corteva reports a -1%.
As for EBITDA margins, Bayer reports a 21% in Crop Science, marking a loss of two points compared to 2022. FMC experiences a 5-point decrease, settling at 19.2%, while Corteva remains steady at 19%. The Chinese competitor, Syngenta, has not yet released complete results, but a similar trend is anticipated.
Despite internal setbacks, Bayer Crop Science retains the market leadership potential outlined in the original thesis.
The major issue at hand continues to be the litigations surrounding glyphosate. As I write these lines, news of another victory for Bayer has just emerged, this time in an Arkansas courtroom. With this win, Bayer has secured victories in 13 out of the last 20 trials.
It's true that in January 2024, Bayer faced its most significant judgment to date, amounting to 2.25 billion dollars. Regarding this, two important points should be highlighted:
Bayer asserts is "unconstitutionally excessive," emphasizing that previous damage awards have been reduced by over 90% in final judgments overall.
Punitive damages are being appealed. In the case of a 2020 verdict of $1.4 billion resulting in a 95% reduction
Bayer continues to assert that RoundUp is safe. In fact, the European Union has extended the use of glyphosate, the key ingredient in RoundUp, for an additional 10 years, until 2033. While the total bill remains uncertain, the impact of ongoing appeals and Bayer's track record to date instills confidence in the original estimates' margin of safety.
Pharma
The segment results are not favorable, but they were expected. It reports a 6% decline in sales, adjusted by 0.4% for foreign exchange and portfolio considerations.
In the thesis, a worst-case scenario was presented where Pharma's EBITDA would be 4.1 billion euros, 1 billion below the current level, assuming a complete decline in Xarelto sales with no replacements. Clearly, this scenario has not materialized yet. Xarelto sales continue to exceed 4 billion euros.
Thanks for reading and please let us know any doubts or comments.
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