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FTSE 350: Year of change for household goods

Household goods companies and food producers must keep up with a changing industry
January 24, 2019

The dominant theme in this sub-sector in 2018 seemed to be 'break up to make up' – one which could prevail into the early part of 2019. Many of the sector’s largest constituents have faced up to the reality that the shape of their respective businesses had to change to better face the future.

Last October, Greencore (GCN) offloaded its US business for a not insignificant $1.08bn (£840m) – a decision chief financial officer Eoin Tonge called “difficult”. But it’s good news for shareholders: Greencore will now return £509m-worth of disposal funds by giving investors the option to participate in a tender offer. Any remaining proceeds will be distributed via a special dividend.

Reckitt Benckiser (RB.) spent the past year transitioning from a consumer goods company into a health and hygiene business. After selling food business McCormick, it bought infant formula maker Mead Johnson last year, which left around 80 per cent of group sales coming from health and hygiene. A better-than-expected performance from the infant formula and child nutrition (IFCN) division at the time of half-year results suggests the group’s corporate makeover could continue to pay off this year. By contrast, PZ Cussons' (PZC) refusal to offload its African business could continue to work against it in 2019. Instead, chief financial officer Brandon Leigh says management is focused on removing divisional "layers" in the business, which could get new products to market more quickly. 

After spurning a Warren Buffett-backed takeover offer from Kraft in 2017, Unilever (ULVR) then reversed its decision to relocate its headquarters to the Netherlands at the end of last year. And chief executive Paul Polman agreed it was time to end his tenure after more than a decade. Alan Jope, president of the company’s beauty and personal care division, replaced him on 1 January 2019, but the battle with the group’s institutional shareholders is far from won. Despite opposing the potential move to Rotterdam – which many claimed was simply a shield from future hostile takeovers – most would still like to see Unilever’s Anglo-Dutch corporate structure simplified. That said, Mr Polman’s final act was to buy GlaxoSmithKline’s (GSK) health food drinks portfolio in India, Bangladesh and 20 other predominantly Asian markets for €3.3bn (£2.94bn) in December.  

Mr Jope faces an uphill battle to maintain the stock’s outperformance against the FTSE 100 index, particularly as customer tastes and buying habits change and online shopping continues to force change across the entire retail industry. That will be a common challenge for most food producers and household goods companies in 2019. Some, like Associated British Foods (ABF), have more direct exposure to the retail sector. Its Primark brand experienced “challenging” trading during November, but “careful inventory management and improved margins” offset most of the damage – it enjoyed a bumper Christmas, reporting higher sales and reduced discounting.

 

NamePrice (p)Market cap (£m)12-month change (%)Trailing PEForward PEDividend Yield (%)Last IC View
Associated British Foods233018446.01-18.4517.115.51.93Hold, 2,350p, 9 Dec 2018
Bakkavor 140811.2-29.939.49.20Hold, 178p, 7 Sep 2018
Cranswick28641476.74-10.8319.218.31.9Buy, 2,716p, 27 Nov 2018
Dairy Crest 448.6697.68-22.8512.7125.06Buy, 449p, 7 Nov 2018
Greencore 1921357.4-13.2791210.32.55Hold, 175p, 4 Dec 2018
Hilton Food 914745.810.9222.521.22.14Buy , 968p, 11 Sep 2018
PZ Cussons210.8903.75-36.6615.714.53.93Sell, 214p, 24 Jul 2018
Reckitt Benckiser 586941523.27-13.6917.916.52.87Buy, 6,747p, 27 Jul 2018
Tate & Lyle690.63228.681.2913.513.24.18Buy, 696p, 9 Nov 2018
Unilever (UK)402246998.30.0519.818.33.31Buy, 4,260p, 29 Nov 2018