We remain Neutral on Consumer Staples:
Two weeks on from the UK Brexit vote and uncertainty still dominates both politically and economically. Against this backdrop, we expect investor appetite for risk to remain subdued and for ‘quality’ stocks to continue to trump any call for a shift into ‘value’ for now. This may well support on-going Staples sector out-performance over the next three months; however, having already outperformed substantially since June 23, the associated +4% PE re-rating of European Staples leaves the sector trading on PE multiple (22.4x) last seen in the early 2000s Tech Bubble. Despite on-going yield support, without another macro shock it is tough to argue for a further significant PE re-rating, however with relative earnings support likely to continue we maintain our Neutral sector stances.
RATING CHANGES: UPGRADE Heineken, Nestlé and AG Barr to OW and Reckitt Benckiser to EW. DOWNGRADE Diageo and BAT to EW and Champagne stocks Lanson, Laurent Perrier and Vranken-Pommery to UW.
- Heineken (PT €90): With the naira devalued and margin expansion structurally
supported by the group’s growth-skewed footprint in Asia and Mexico, medium-term
margins may beat guidance of 40bps p.a. and prompt upgrades to F17E in our view.
- Nestlé (PT CHF82): Given the uncertain macro backdrop, the combination of Nestlé’s
geographic/product diversity, dividend yield, new CHF 1.8bn cost saving plan and
prospect for positive strategic change under the new external CEO is appealing. We
expect the shares to re-rate from a discount to premium to the sector.-
- Diageo (PT 2150p): Momentum is improving but the recent re-rating has closed the
stock’s historical PE discount. Although we see reasons for earnings upside from greater
efficiency savings and incremental cash returns, with neither likely until 2017 and without
on-going GBP weakness, the shares lack a catalyst for further out-performance.
- BAT (PT 5100p): Although we remain positive on the tobacco sector and BAT’s ability to
beat EBIT margin expectations over the medium-term (driven by SAP deployment), after
recent out-performance, our upside case fair value is <10% away.
- Other stocks to consider: We re-iterate our OW on Britvic which is now trading at
decade relative lows, Imperial Brands as it should close its relative PE discount to Staples
and Rémy Cointreau, which is enjoying transactional FX support.
Navigating Q2 earnings: We preview Q2 earnings in this report. In the near-term we
prefer Britvic, Carlsberg, Nestlé & Unilever over CCH, Henkel and Reckitts.