Deal with Bayer More Likely Given Weak '17 Outlook

Deutsche Bank Markets Research Rating Buy North America United States Industrials Chemicals / Commodity Company Monsanto Date 30 June 2016 Forecast Change Deal with Bayer More Likely Given Weak '17 Outlook Reuters Bloomberg Exchange Ticker MON.N MON UN NYS MON Forecasts And Ratios Year End Aug 31 2015A 2016E 2017E 2018E FY EPS (USD) 5.72 4.44 4.80 5.45 Source: Deutsche Bank estimates, company data Mid-teens EPS growth pushed to '18 from '17. Reiterate Buy on likely M&A ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. 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. MCI (P) 057/04/2016. Price at 29 Jun 2016 (USD) 103.52 Price target 118.00 52-week range 112.47 - 83.11 David Begleiter Research Analyst (+1) 212 250-5473 david.begleiter@db.com Jermaine Brown Research Associate (+1) 212 250-3624 jermaine-r.brown@db.com Key changes Price target 100.00 to 118.00 ↑ 18.0% EPS (USD) 4.75 to 4.44 ↓ -6.5% Revenue (USDm) 13,536.9 to 13,178.8 ↓ -2.6% Source: Deutsche Bank Price/price relative 80901001101201307/131/147/141/157/151/16MonsantoS&P 500 INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -5.5 14.2 0.2 S&P 500 INDEX -1.3 0.8 0.6 Source: Deutsche Bank Price Target $118 Our $118 price target is based on Monsanto trading at 14.9x 2017E EBITDA, roughly in-line with recent chemical acquisition multiples and based on our increased belief that an acquisition offer of $135/share will be announced and accepted by Monsanto. Risks: lower grain prices, lower glyphosate pricing, and a weaker Brazilian real. Monsanto had a weak FQ3 release as EPS missed by 11%, '16 guidance was moved to the lower end of the $4.40-$5.10 range (cons: $4.64) and management provided a cautious '17 outlook (mid-teens EPS growth now expected to resume in '18 vs ('17 previously) due to lower glyphosate pricing, lower licensing income and a weak ag market. While Monsanto reiterated that Bayer's $122/shr offer is "financially inadequate", CEO Hugh Grant stated he has been in discussions with Bayer along with other parties regarding alternative strategic options. With the weak '17 earnings outlook, on the margin, making a deal with Bayer more likely (in the $135-$140 range), Buy. FQ3 misses by 10%. Monsanto guides to low end ’16 EPS range of $4.40-5.10 Monsanto reported FQ3 EPS of $2.17, down 14% and $0.23, or 11% below consensus. A lower-than-expected tax rate added $0.02. The shortfall was due to lower than expected corn and soybean results. Corn gross profit rose 3% to $976MM (cons: $1.11B) on mix uplift partially offset by adverse FX (Argentine Peso), increased US price discounting and higher COGS. Soybean gross profit fell 26% to $391MM (cons: $607MM) on higher Xtend launch costs, delays in EU import approval, and lower US volumes, partially offset by increased INTACTA adoption. Ag Productivity gross profit fell 51% to $331MM (cons: $357MM) on lower glyphosate pricing and the absence of a licensing deal. Monsanto guided to the lower end of ’16 guidance of $4.40-5.10 (cons: $4.64). Lowering '17E by $0.65 to $4.80, ‘18E by $0.80 to $5.45 While’16 EPS is now expected to be at the low end of guidance, it is not a big surprise as it reflects well-flagged and persistent ag headwinds. More disappointing, in our view, was the cautious ‘17 outlook as Monsanto now expects mid-teens growth to resume in '18 vs '17 previously. In addition to weak ag trends, the lowered guidance is due to weaker glyphosate pricing, particularly in H1, and lower licensing income (vs $370MM, or $0.63 in ’16). The ’17 outlook was not without positives however as Monsanto continues to see rapid adoption of its soybean technologies with i) INTACTA targeted to expand to 45-55MM acres from 35MM acres in ‘16 and ii) Xtend targeted to grow from 1MM acres in ’16 to 15MM acres in ’17. Meanwhile, Monsanto expects 2/3 of the $150MM in costs in ‘16 related to the launch of Xtend to go away in ’17 (a $100MM, or $0.17, tailwind) and corn and soybean COGS to be $100MM, or $0.17, lower in ’17 vs ’16. And lastly, Monsanto remains on track to achieve $500MM of savings from its June 2015 restructuring program by ‘18, with $375-$420MM in savings by ’17. On the Bayer acquisition proposal, while reiterating the $122 offer was “financiall