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European HPC
Earnings have more to fall; downgrading Beiersdorf,
L'Oreal, upgrading Oriflame
Cosmetics & Personal Care,
Household Products
Celine Pannuti, CFAAC
(44-20) 7325-9276
celine.pannuti@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 52 for analyst certification and important disclosures, including non-US analyst disclosures.
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European HPC - relative to market 12m
Fwd PE, 1995-2009
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Feb-95 Feb-02 Feb-09
14-yr average
Source: Datastream.
• We resume on the European HPC sector with a bearish outlook. We
prefer stocks with limited earnings downside: OW Reckitt Benckiser
(RB), Givaudan (GIV), SCA but we would shy away from those where we
see earnings risk: UW: Henkel (HEN), Beiersdorf (BEI) (downgrade from
OW). We are N: L’Oreal (OR) (downgraded from OW), Oriflame (ORI)
(upgrade from UW), Unilever (UN), though we see the risk/reward balance is
becoming increasingly favourable for OR and ORI.
• We expect EPS growth of -4% in 09E, +7% in 10E. While the market
appears to have already priced in some slowdown, our estimates are 5% and
9% below market for ’09 and ’10. We expect the severity of consumer
demand fallout to put FMCG at odds with meeting long-term goals based on
value added and emerging markets growth.
• Mid term degradation of growth due to negative mix. Consumers downtrading
and heavy trade promotions should lead to negative Mix,
notwithstanding potential Price deflation in H209. We expect volume to be
broadly flat to slightly up. We forecast 1.5%LFL growth for the sector in 09E
(+2% in 10E), with worse performances at HEN, UN, OR.
• Margin defensiveness a myth, we see erosion in profitability. Past pricing
actions, falling input costs and lower media rates will provide a cushion for
09, yet we think negative Price/Mix will hurt profit models. We see risk of
margin erosion unless companies meaningfully adjust their costs to the new
economic realities. We expect a 90bps fall in margins in ’09E and a 10bps
improvement in ’10E, with the steepest falls for HEN, ORI, BEI.
• We believe premium valuation at risk, though absolute value exists. We
think the sector’s 60% premium to the market is not sustainable in the face of
worsening news flow and earnings downgrades. We see value in absolute
terms but we have yet to see the pain before getting the gains.
Table of Contents
Investment Thesis ....................................................................3
Earnings and Valuation............................................................6
Earnings downgrades not finished yet .........................................................................6
Premium valuation at risk ............................................................................................8
Negative Price/Mix to Hit Growth ..........................................13
Consumer downturn to hit growth rate ......................................................................13
Negative PM, sluggish volumes, slower EM.............................................................14
Margin pressure though low visibility ..................................19
Working through the margin model...........................................................................19
Input costs are coming down .....................................................................................21
FX volatility continues...............................................................................................22
Beiersdorf ...............................................................................23
Moving to Underweight on earnings miss .................................................................24
Givaudan.................................................................................26
Pricing, Quest savings to lend support to volatile 2009.............................................26
Henkel......................................................................................28
We are c20% below consensus on 2009 and 2010.....................................................28
L’Oréal .....................................................................................30
Top line write off but time to accelerate efficiency ...................................................30
Oriflame...................................................................................32
Risk/Reward looking increasing favourable ..............................................................32
Reckitt Benckiser ...................................................................34
Not ‘Finish’-ed yet.....................................................................................................34
SCA..........................................................................................36
HPC exposure to prevent a full-scale leakage............................................................36
Unilever ...................................................................................38
Short-term visibility and performance to remain poor...............................................38
Valuation methodologies and risks to our ratings, estimates and target prices..........40
Summary Financials...............................................................43
The authors acknowledge the contribution of Ankur Gupta of J.P. Morgan Services
India Private Ltd., Mumbai, to this report.
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