HPC Handle with care
This year, the Europe Stoxx HPC (home and personal care) sector gained 8.9%. Excluding the currency impact, this performance is in line with its US counterpart (S&P 500 HPC sector +9.1%). The broader S&P 500 consumer staples sector is up 4.5%. In the first half of the year, HPC was a strong outperformer. Recently it lost some of its shine. What lies behind these movements?".
Audacious takeover attempts such as Kraft Heinz’s USD 143 bn bid on Unilever in February 2017 supported the sector’s performance. Such deal would have led to the world’s secondlargest consumer goods company by sales. However, with an 18% premium offered this offer was considered as hostile and instantly rejected by Unilever. The bid also met fierce opposition from Unilever’s management and politicians. Kraft Heinz eventually threw the towel and issued a joint statement on 20 February on an amicable agreement to withdraw the offer.
In the wake of this event, Unilever published a three-year plan to improve profitability, re-center its portfolio (sale plan of entities with lower growth and profit prospects) and to increase EBIT margin by 60 to 80 basis points every year in FY17 and FY18 (guidance for FY17 was later increased to +100 bps). Additional cost savings measures have also been announced, which should deliver at least EUR 1 bn by FY19. Unilever has set the bar high, at a time when sector peers are struggling with declining organic growth (~2% on average in 2Q17).
Looking ahead, the outlook for European HPC 3Q17 is rather mixed. Only a slight pick-up in organic growth is expected in the sector supported by a soft comparison base. Additionally, increasing digitalisation and changing consumer habits puts the sector’s business models into question. Advertising & promotion (A&P) budgets were cut in 1H17. Companies intend to invest more in A&P in 2H17 to boost sales. Finally, market leaders are actively buying promising newcomers, often at a very high valuation premium
When reviewing our sector coverage, we maintain our Neutral stance on L’Oréal due to high valuation (25x P/E 18E) in a contextof lower expected EPS growth (3.9% in 17E and 5.1% in 18E). Inour view, a change in shareholder control seems also unlikely (Bettencourt family 33.0%, Nestlé 23.1%). We downgraded Estée Lauder (EL) to Neutral. While EL’s best-in-class results and highest organic growth justify a premium valuation (25.9x P/E 18E), the share price has been up nearly 42% since the beginning of the year, leaving the risk/reward ratio less attractive. Finally, we believe Henkel exhibits the best risk/reward combination in the sector. In our view, recent share price weakness may not be justified. Henkel owns a leading position in adhesives technologies, a market segment where growth potential may be underestimated by the market.
Danny Van Quaethem
Data & recommendations as of 09 October, 2017 close
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