There are lots of moving parts for companies in the household goods and food producer sub-sectors as each grapples with the challenges of macro trends facing their industries.
Emerging market demand - and the strength of it in the near term - will be a key concern for investors in household goods groups given a significant chunk of their sales come from developing economies. Tied to this is the impact currencies have on reported numbers - an example last year being the effect the precipitous fall of the Nigerian naira and Australian dollar weakness had on the numbers at PZ Cussons (PZC). The lack of any significant inflation in developed economies also makes the more far-flung parts of the world even more important.
The businesses in this space are also busy implementing internal strategies. Reckitt Benckiser (RB) is continuing with its 'Project Supercharge' cost-cutting initiative aimed at saving £150m annually and its strong product pipeline should help it meet its recently nudged up profit expectations. Meanwhile, Unilever (ULVR) is trying to invigorate higher margins, by focusing on its personal care division and through its recently launched baking unit.
Emerging markets also play a key role for the food producers, something pork and chicken producer Cranswick (CWK) is plugged in to. The company saw exports to the Far East rise 17 per cent at its half-year results, a measure of how popular western-style food is becoming in countries such as China.
But potentially more important are the various trends driving the eating and drinking habits of western consumers. Here, there is a strong and growing demand for natural products, which should be a boon for Dairy Crest (DCG) thanks to its strong Cathedral City cheddar brand. Product development of its spread Clover, which has led to all artificial ingredients being removed, should also fit nicely with this trend.
Furthermore, the insatiable desire for food away from the home, via fast-growing chains or more established retail names, should continue to benefit convenience food business Greencore (GNC) and other smaller business involved in providing food to high-street shops.
Another trend dominating several companies' development efforts is the consumer push for lower-calorie and lower-fat products. Tate & Lyle (TATE) is one such business and its new products division last year achieved its first commercial sales of Dolcia Prima. This uses the rare sugar alluose which has 90 per cent less calorie content than conventional sugar. It is likely more products of this ilk will appear as competition for the calorie-conscious consumer becomes even more visceral - especially given the potential tectonic shifts in the sugar market, which could see prices drop once Europe lifts its production quotas in 2017.
| Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: | |
|---|---|---|---|---|---|---|
| ASSOCIATED BRITISH FOODS | 3,010 | 23,829 | 29.6 | 1.2 | -3.3 | Sell, 3,578p, 10 December 2015 |
| CRANSWICK | 1,901 | 945 | 18.5 | 1.8 | 39.1 | Buy, 1,771p, 01 December 2015 |
| DAIRY CREST | 603 | 831 | 21.0 | 3.6 | 28.0 | Buy, 638p, 06 November 2015 |
| GREENCORE GROUP | 350 | 1,440 | 26.4 | 1.8 | 21.9 | Buy, 312p, 25 November 2015 |
| PZ CUSSONS | 278 | 1,191 | 15.5 | 2.9 | -10.3 | Hold, 355p, 22 July 2015 |
| RECKITT BENCKISER GROUP | 6,099 | 43,152 | 23.7 | 2.1 | 13.6 | Hold, 6,267p, 21 October 2015 |
| TATE & LYLE | 591 | 2,754 | 16.2 | 4.7 | -8.5 | Hold, 608p, 06 November 2015 |
| UNILEVER (UK) | 2,934 | 37,657 | 22.2 | 3.0 | 7.5 | Hold, 2,826p, 13 January 2016 |
Favourites
The sale of its capital-intensive low-margin milk business to Müller Wiseman makes Dairy Crest a more attractive proposition. We're also keen on Cranswick, which as well as its growing emerging markets business is in a dominant position when it comes to supplying prepared meat to the high street.
Outsiders
Although a food-related group, Associated British Foods (ABF) is dominated by clothing retailer Primark. The brand accounts for roughly two-fifths of sales and three-fifths of profits. The strong dollar is an issue for the retailer and margins could remain under some pressure. Sugar accounts for 14 per cent of sales at ABF, but only 4 per cent of profit following a whopping 76 per cent constant-currency fall last year. The aforementioned changes to EU sugar quotas in 2017 provides further uncertainty.
