Spirits over beer, with a splash of soft drinks
Stock calls: Our top picks are Pernod, Diageo and CCH. More rational competition in Brazil and a return to profit growth in the US could help improve sentiment on ABInbev. We downgrade Heineken to Underperform from Neutral due to a weaker growth outlook in Mexico and potentially increased competition in Vietnam, the main growth drivers in recent years, as well as building margin pressures. We also downgrade Remy and Refresco to Neutral after recent outperformance and relative re-rating.
Prefer spirits over beer: We reiterate our preference for spirits over beer in FY17, noting i) higher exposure to improving US discretionary spend, ii) improving momentum in Scotch and Cognac (in particular China) volumes following three years of weakness, iii) improving margin visibility from selfhelp and mix, iv) transactional FX tailwinds, and v) evidence of improving cash conversion and de-leveraging. We downgrade Heineken to Underperform, Remy and Refresco to Neutral and adjust our target prices.