● Unilever remains our top pick: With 76% sales generated globally from country
category cells where Unilever is gaining or holding share, as well as positive
growth in new product launches and the Net Revenue Management programme,
we feel the most comfortable with Unilever’s ability to accelerate organic growth,
despite some short-term potential disruption from demonetisation in India. While
Unilever has the biggest input costs pressures, its exposure to high or mid-level
price elasticity categories is the lowest of the group at c20%. The margin should
benefit from the initial EUR1bn overhead costs savings, which should enable up to
50bp pa margin expansion versus the 30bp historical rate. Our 9.2% EPS CAGR is
in line with its constant currency EPS CAGR over the last five years (Unilever is the
only stock to deliver positive EPS growth – a 5.5% CAGR). We believe a sale of the
Spreads division is likely which, with further bolt-ons in HPC, means Unilever
could exit 2017 with 70% of profits from HPC, driving the long-anticipated rerating
towards HPC.
● Nestlé – change ahead, but patience needed: Expectations for new CEO Mark
Schneider are higher, with hopes of greater cost discipline, further portfolio
restructuring in the core food and beverage portfolio and rapid growth of the
Nestlé Health Science division. While not unreasonable expectations, we are
mindful of the timeframe for communication and implementation of significant
strategic actions. In the meantime, we take comfort by the fact that 52% of Nestlé’s
sales globally are generated from country category cells gaining or holding share
(68% in emerging markets), with 50% of sales from categories with low or very low
levels of price elasticity. Margins should start to benefit from the 200bp structural
cost saves, although most of the benefit will not be until 2018. Our 7.4% EPS
growth for 2017 is in line with historical constant currency EPS growth.
● Danone – highest earnings potential, highest risk: Danone has de-rated the most
of the three, with now the lowest P/E (15.6x 2018), and the highest earnings
growth (12.5% CAGR through 2018), due to WhiteWave. However, we see greater
forecast risk due to the lower visibility on trading at Early Life Nutrition (ELN) and
Waters (Mizone) in China, as well as the timing of completion of WhiteWave.
Although 59% of Danone sales are gaining or holding share, it has the highest
exposure to categories with high or mid-level price elasticity. We now believe that
Danone has now played its M&A card for the next three years.