We increase our Syngenta target price to CHF450/share and retain our OUTPERFORM rating following the 1H result (average 1-2% EBITDA increases). Our increased target price is a reflection of: 1) 75% chance of a CHF480/share bid being successful; and 2) 25% chance of the bid not being successful (underlying valuation CHF362/share).
* Syngenta's 1H result (in line with consensus after accounting adjustments) provides some earnings/valuation support against the Monsanto proposal at this point in the ag cycle. Earnings quality (considering low cash flow and
adjustments) somewhat impedes the sustainability of the report. However, we believe this is sufficient for Syngenta shareholders to consider a raised bid (CS has previously suggested CHF480/share is still ~5% accretive to Monsanto) as more palatable to shareholders.
* Key Investor Concerns and Regulatory Hurdles Need to Be Addressed: In our view, one of the largest misconceptions pertaining to a MON/SYNN combination is that an "excel analysis" yielding EPS accretion is far from the complete picture and ignores key long term considerations. Based on our analysis, we believe some key regulatory, customer and cultural risks remain underappreciated. While currently the market appears to be giving the "benefit of the doubt" on the financial risk front (fair considering consolidated entity gearing <3x ND/EBITDA), we believe the aforementioned risks still need to be addressed in the intermediate/long term and are not necessarily mutually exclusive.
* Catalyst: Recommencement of discussions between Monsanto/Syngenta, potential for raised bid. Valuation: Monsanto’s current proposed bid (CHF449) implies EV/EBITDA of 14.8x (premised upon FY15F guidance). This represents a ~30% premium to two year averages. At CHF480 (bid price incorporated within our target price) we estimate an implied 15.8x EV/EBITDA.