* Soft 1Q14 largely expected — Most companies offered cautious commentary with
their 2014 guidance in the recent 4Q reporting season, particularly with reference to
the first quarter of the year. The tone was echoed at CAGE, with companies
flagging slower EM demand, limited signs of a DM pick-up, fewer trading days (on
the timing of Easter) and bad weather, especially in the US. Combined with further
FX-driven downgrades to EPS, we do not expect a particularly good quarter for the
group as a whole, although we think this is quite well anticipated.
* Large-cap Food — Nestlé is likely to post the strongest organic growth amongst
the Food companies at 4.2% and the market will focus on the credibility of the
growth being 2H14-weighted. Unilever’s 1Q14 is likely to contain few surprises with
guidance for 1Q to be at the low end of the 3-5% range given for the full year. The
market will look for whether the recovery in EM growth in 4Q13 has been sustained.
Danone’s growth will be significantly held back by ongoing headwinds in China, we
forecast organic growth of 2.4% with Baby Nutrition -10%. ABF’s 1H14 results are
unlikely to surprise given a detailed pre-close; we forecast EPS of 45p (+9%) and
expect the market to focus on the extent of margin expansion for Primark.
* Large-cap HPC — The HPC companies continue to be slightly more resilient to the
EM slowdown than companies in other staples categories, but we still expect a
slight moderation in EM growth across the board. As a result, we prefer companies
where we see a DM offset in the current quarter and we see Beiersdorf (turnaround
sustaining its momentum in Western Europe) and Reckitt (further Health strength in
ENA, despite the difficult US flu comp) as best placed to deliver resilient growth.
* Changes to estimates & price targets — We make minor changes to estimates to
reflect updated currency assumptions. For ABF, Primark’s stronger LFL and margin
performance leads us to raise our FY14E EPS by 2% despite lowering out Sugar
estimates. However, lower Sugar estimates and currency headwinds lead us to
lower our FY15E EPS by 2%. We update and roll forward our SOTP valuation to
use ABF’s FY15E divisional mix. In valuing Primark we now apply a 20% premium
to Inditex to reflect the accelerating margin trajectory, as well as the high visibility of
~20% profit growth in the medium term. Our TP increases to £30.