We held our annual Consumer Conference this week. Of the European
beverages companies, we hosted ABI, Diageo, Heineken, Pernod Ricard,
Carlsberg, CCH, Stock Spirits and AG Barr. Our top picks remain
Heineken (OW, AFL) and Diageo in the large caps and AG Barr in SMID.
We are Neutral on Pernod Ricard, CCH and Stock Spirits and UW on
Carlsberg.
* Diageo and Pernod Ricard are currently losing share in the US, but
expect share to stabilise in FY17 before outperforming the industry in
FY18. Both companies are striving to stabilise or increase sales of their
vodka brands, with flavours expected to be a much lower part of total
sales. In China, PR does not believe it is losing share but it is too early to
comment on growth in FY17E, while Diageo's Baijiu is seeing strong
growth and its Scotch is expected to growth in FY17E on easy comps.
In India, DGE’s USL is expected to regain lost share in the MT, and PR
expects continued DD growth. Capital allocation is expected to be in the
form of consistent compounding rise in the dividend flow for DGE and
bolt-ons for PR.
* We are confident that Heineken can deliver above-average HSD organic
EBIT growth with challenges in Africa offset by strong growth in
Mexico and Vietnam, as well as cost savings. We do not expect FEMSA
to sell its stake in the S-MT. For Carlsberg, delivery of cost savings on
a sustainable basis remains the key issue. Mixed views on potential PE
entrance in the Central European beer industry with Heineken preferring
industry consolidation and Carlsberg believing that focus on cost (and
therefore price) would be constructive.
* CCH’s good performance in Nigeria and Italy is partially offset by
continued decline in Russia and challenges in Greece. Revenue
management and cost savings remain a focus. A.G. Barr’s priority is to
grow its market share in England & Wales, with emphasis on expanding
its range of SKUs in the grocery channel, supported by bolt-on M&A.
Stock Spirits is comfortable with consensus and expects to generate FCF
of at least €20m in FY16E.