Farewell

I’m very pleased to announce that I’m joining the research team of Lombard Odier Darier Hentsch & Cie in Geneva .
Consequently, I will not post any new comments on my site.
I want to thank you all for your continuous support.
For those who will be lost without my insight, you will have to join LODH fine clientele !

V.A

Heineken

Stock price: €37.1
Conclusion: We reconfirm our positive view on Heineken. We see room for further rerating as Heineken demonstrates that it can grow double digit in adverse markets. We upgrade our valuation range to €44-€46 per share.

H1 results: Sales up 5.2% to €7.5bn (down 2% organic)-EBIT +14% reported-+5.7% organic-Net profit +29% reported (+17% organic). Guidance F10: organic increase in net profit should be at least in low double digit.

H1 confirmed a tough environment which might continue in H2
-Volume declined by 3.9%, with Eastern Europe down 11% due to Russia, Western Europe falling 2.6% and the US down 1.7%. Africa and Middle East (+6%) and Asia (+3.3%) to a lesser extent, partly compensated the negative trend in developed markets.
-Pricing remained positive (+1.9%) despite the absence of price increase in the US market.
-Management remained cautious expecting a similar trend in the second part of the year.

Bottom line resisted well
-Faster growth for Heineken premium brand (+4.1%) bodes well for gross margin.
-H2 is expected to benefit from lower input costs owing to hedging. Management expects barley prices to reflect some pressure on cereals, notably in Russia and to a lessser extent in Western Europe.
-Costs savings provided €104m in H1 (€259m as of the start off 2009) representing 140bp of sales. The bulk of savings were achieved in Europe, enabling to compensate for lower volumes. Total expenses decreased by 2.8% organically, faster than sales, despite higher marketing and selling expenses (+5.3% organic). As a result, EBIT grew 6% in Western Europe and fell by only 4% in Eastern Europe despite a sharp decline in volumes. Ebit grew also in Americas helped by positive hedging and costs savings.
-Financial costs reflect ongoing deleveraging. driven by increased free cash flow generation (€700m vs €383m last year).
-The geographic balance is moving following the acquisition of Femsa and the disposal of MBI and GBNC in Asia Pacific. Sales and profits in Americas will more than double. Femsa sales and profits could achieve €2.1bn and €250m on our estimates this year. Conversely, the weight of Asia Pacific in sales will come down following the tranfer of assets to APB, while UB in India is not consolidated. Nevertheless, the share of profits of associates and JVs could jump by 40%.
We expect EPS to achieve €2.41 in F10 and €2.72 in F11 respectively.

Heineken trades at 13.7xP/E and 7.7xEV/EBITDA based on our 2011 estimates, implying 10%+ discount to peers. We expect the stock to further rerate: short term, notwithstanding weak volume, we think Heineken offers relatively good visibility on the bottom line thanks to positive mix and cost cutting in Europe. Longer term, increased exposure to emerging markets will provide a new growth platform for the Heineken brand, notably in Latam and in India, while enabling a broader portfolio approach in the imported premium beer segment in the US. We upgrade our valuation range to €44-€46 per share.

Performance Recap

Key changes:

-We reintroduced Burberry
-LVMH: we upgraded our valuation target to €109-112
-ABI: we upgraded our valuation target to €50-52

-PPR, ABF and Burberry almost reached our target.

*Price 09/15/10**Since Rec date***2 months

	Rec.Date	Price	Price*	Perf**	Perf***	Valuation	Upside
Nestle	04/22/09	37,5	53,1	+41.6	-0.5	59-62	+16.8
ABInbev	05/09/09	24,8	43,3	+74.5	+3.3	50-52	+20.0
Heineken	06/11/09	24,9	37,5	+50.6	+2.2	42-44	+17.3
Puma	11/10/09	231	222,5	-3.7	-2.3	260-275	+23.5
PPR	11/18/09	82,0	115,7	+41.1	+14.7	115-120	+3.7
ABF	01/14/10	860	1064	+23.7	+0.8	1100-1130	+6.2
P&G	01/29/10	61,7	61,1	-1.0	-2.2	73-75	+22.7
LVMH	02/08/10	74,9	101,2	+35.1	+11.2	109-112	+10.7
Tiffany	03/22/10	46,9	43,8	-6.6	+8.7	54-55	+25.5
Richemont	05/31/10	37,8	43,8	+15.8	+10.6	46-48	+9.6
Burberry	07/16/10	812	906	+11.5	+11.5	900-920	+1.5

Anheuser-Busch Inbev

Stock price:€42.9
Conclusion: ABI grew faster than peers in H1 thanks to Brazil which played a key role, more than offsetting lackluster growth elsewhere. We look for a more balanced second half, with Brazil slowing down and the US benefiting from easier comps. We see the arbitration ruling between Modelo and ABI as an additional positive development. We raise our valuation range up to €50-€52 per share.

H1 results: Sales up 9.2% to $17.5bn (+3% organic)-EBIT +11%-EBITDA+9.4%-EPS +20%. Guidance 2010: EBITDA growth to accelerate in Q3 and Q4.

Brazil, key contributor to EBITDA growth in H1 (+5.4% organic-+9.4% reported)
-Volume growth (+1.5% H1 +2% Q2) was driven by Latam, notably Brazil, up 15% in H1 (+13.7% Q2) and Argentina in Q2. North America remained weak with shipments in the US down 4.8% in H1 (-3% in Q2). Russia was largely responsible for the decline in Eastern Europe, while Western Europe returned to slight growth in Q2. Growth in China was held back by cold weather and heavy rainfall.
-Latam accounted for 85% of EBITDA growth at constant currency. Forex further boosted EBITDA in H1, mainly due to Brazil.
-ABI set the bases for profitable growth. Cost of sales decreased by 1.3% per hl, while revenue per hl expanded +1.3%, leading to +5% gross profit. Synergies were front loaded, achieving $310m vs $500m forecasted for the year. Administrative expenses fell 11% in H1 (-17.6% in Q2), enabling EBIT to increase despite rising marketing expenses.

Easier comps bode well for H2
-Volume and pricing should improve in the US. Although it is hard to see any improvement, management looks reasonably confident. Shipments in H1 fell faster than sales to retailers (STRs down 2.9%), suggesting that inventory levels are low. CFO expects shipments for the full year to move broadly in line with STRs. Comps in the US will also become easier in Q3 and Q4. Last, mix turned positive in Q2, which looks encouraging for the second half of the year. Management confirmed it will take some price increases in the US.
-Cost of sales should remain under control, expected to be flat or slightly up for the year, helped by positive forex hedging.
-Marketing expenses will face easy comps, notably in Q4. ABI spent almost 30% of its marketing budget last year in the fourth quarter.
-Working capital is expected to release cash in H2 and be positive for the year. We expect EPS to reach $3.01 (+21.5%), net debt to fall to $40bn (3xEBITDA).

ABI trades at 15.3xP/E and 8.2xEV/EBITDA based on our F11 estimates. We expect the stock to further rerate helped by superior earnings visibility. We raise our valuation range up to €50-€52 per share.

Long ABI at time of writing.

Unilever

Stock price: €21.3
Conclusion: Notwithstanting the transformation taking place, we feel that Unilever might continue to trade at a discount vs peers, owing to some weaknesses in its product portfolio, lack of pricing power and lower earnings visibility than peers.

H1 Results: Sales up 9.7% (+3.8% organic) to €21.9bn. EBIT margin up 30bp-Net earnings +36%- EPS up 36%. Guidance 2010: volume growth, strong cash flow along with steady improvement in operating margin.

Unilever’s top line (+3.8%) lags behind peers
Sales grew at a much slower pace than Nestle ( up 5.7%) or Danone (up 7%) despite outstanding expansion in the personal care division, up 7.9% in H1, combined with a higher innovation rate.
-Unilever suffers from a structurally weak portfolio in food. Ice cream and tea are doing well but the bulk of the business , savoury, dressing and spreads remained flat in H1. Savoury (Knorr) performed well but spreads continue to decline and Unilever struggles to convince butter users to switch to margarine. Mayonnaise keeps suffering from negative health perceptions.
-Home care sales (+2.4% in H1) where impacted by strong competition in liquid laundry where P&G is buying volumes.
-Personal care, once again had a stellar performance (+8%), driven by Unilever’s leadership in deodorants and good momentum in skin cleansing. However, the division accounts for only 30% of sales today and Unilever is still underrepresented in certain categories, like hair care and skin care.

Lack of Earnings visibility
Management reconfirmed 2010 outlook, notably steady improvement in operating margin. Nevertheless, this will be hard to achieve given low pricing power coupled with higher input costs and weak sales in Western Europe.
-Low pricing power at a time when input costs are rising. Pricing was down 2.6% in H1 and 2% in Q2 with all regions posting a decline. Unfortunatly, Unilever does not disclose pricing and volume by categories which would be really useful to understand the business. Management looks for a return to positive pricing by the end of the year, which should be a challenge in markets, such as Western Europe, where both pricing and volume were negative in Q2.
-Less savings in H2. Management forecasts €300-400m savings in H2 vs €700m in H1 (180-200bp difference).
-Restructuring will, again, alter earnings quality. Restructuring charges should account for a similar proportion of sales in H2, around 120bp (€530-550m for the full year). Management warned that the integration of Sara Lee business will require further spending and prevent the group from returning to a more normal level of charges next year.
-Therefore, advertising and promotions is the only variable likely to move. Unilever indicated that expenditure will be flat in absolute terms in H2, implying a sharp decrease as a percentage to sales. We understand that this should help to meet guidance but wonder about the timing when markets become increasingly competitive.

Unilever trades at 13.5xP/E and 8.5xEV/EBITDA based on our F11 estimates, which implies a slight discount to peers. Our DCF points to a higher value of around €23-€24 per share. Nevertheless, a re-rating seems unlikely in the short term.

Nestle

Stock price: SF52,2
Conclusion: Superior pricing power combined with earnings quality. We reconfirm our valuation range (SF59-SF62 per share).

H1 results: sales up 5.7% to SF55.3bn (food and beverage +5.7% organic)-EBIT up 13.6%-EPS+13.6%. Guidance 2011: around +5% organic growth and EBIT margin improvement.

We expect Nestle to further rerate against peers.

The only large cap combining volume and pricing.
Organic growth reached 5.7%, driven by volume (+4.2%) and also pricing (+1.5%).
-Nestle’s growth drivers include emerging markets (35% of sales) up 11.3% in H1. Nestle’s exposure is even greater in dairy (80%), powdered beverages (65%), infant nutrition (50%), ambiant culinary, soluble coffee and confectionery. Nestle is still under-exposed in certain categories such as ice cream, water, pet care or frozen foods. Management has not seen any indication of any slowdown in any emerging market.
Nestle managed to grow even in Western Europe (+2.5% organic on average in the last five years).
- Solid pricing power in a challenging environment. Unlike peers Danone or Unilever, Nestle preserved positive pricing in all regions, Europe, America and zone AOA. Water was the only division to report negative pricing in H1. Beverages, confectionery and milk products reported above average price increases.

Bottom line reflects a virtuous circle
-Gross margin could be up 80bp in 2010, less than in H1 (+160bp) due to input costs headwind, notably in confectionery, nutrition and water. Nestle expects input costs to rise at the top end of its +2-3% forecast. As result, pricing should stop trending down and stabilize in H2.
-Distribution and administrative costs should continue to benefit from savings (down 40 and 20bp respectively in H1). According to CFO, “the best is still to come from Globe processes and data systems” Nestle expects to save around SF1.5 bn per year vs SF1bn in the past through synergies, increased simplicity, speed and flexibility.
-Innovation will require further increase in marketing spending (up 140bp in H1).
-One should also highlight the absence of major restructuring charges which often pollute competitors earnings (cf Unilever).
All in all we expect sales to reach SF106bn, EBIT margin to reach 13.5% in the core F&B business and net earnings to achieve SF11.1bn-EPS SF3.27.

Nestle has just completed the sale of Alcon to Novartis for $28.3bn.
-We expect free cash to achieve SF8.1bn this year.
-Following the disposal of Alcon and SF10bn projected share buy back, we forecast net debt to fall below SF1.2bn by the end of December.
-Nestle targets a return to F09 debt level of SF18bn by F12, which would imply continuing share buy backs at around SF10bn pa.
-As to L’Oreal, we reiterate our conviction that Nestle would be interested in taking the full control of the company.

Nestle trades at 14.9xP/E and 8.6xEV/EBITDA based on our 2011 estimates, which leaves further upside for such a quality stock. We confirm our valuation range of SF59-62 per share.

Long Nestle at time of writing.

L’Oreal

Stock price: €77.4
Conclusion: L’Oreal’s return to market share gains coupled with good visibility on the margin front justify its current valuation. H1 results lead us to reiterate both our estimates and our valuation range (€83-€86 per share).

H1 results: Sales up 10.2% reported to €9.7bn (+6.3% organic)-EBIT +21%-Net earnings +16.5% to €1.4bn-EPS +15.3%. No guidance for the year, but management confident to strengthen positions and profitability.

We find the current valuation sustainable for three reasons.

Superior visibility on the top line front
-New markets are driving cosmetics growth (+3+4%). New markets account for more than half of the total market and close to 90% of global growth (+9.5% in H1). Asia and Latam grew respectively by 10% and 13% in H1, more than offsetting flat demand in Western Europe and only 2% growth in the US. Management expects new markets to continue to fuel growth in H2 and beyond 2010.
-L’Oreal is expanding 1.5x faster than peers. L’Oreal outperformed competitors everywhere, in new markets (+13%) but also in the US (+5%) and in Western Europe (+2%). Innovation should again drive sales in H2, notably Lancome (Teint Miracle) YSL (Rouge Pur), new perfumes (Belle d’Opium, Acqua di Gioia, and Big Pony Collection from RL). We expect new markets to account for 37% of sales in 2010 and to become the first zone next year ahead of Western Europe.

Positive leverage
-Pricing remain under control with +0.7% net price impact in H1 unlike some competitors.
- Gross margin should be slightly up this year, helped by productivity gains, purchasing and distribution savings and positive mix less hedging costs.
-Commercial and administrative costs will decrease as a percentage of sales, more than compensating for higher advertising and promotion expenses.
We look for sales up 12.4% to €19.6bn, EBIT margin to reach 15.5% and net earnings to increase 16.8% to €2330m (minor change vs our previous estimate due to higher taxation).

Very strong balance sheet
-We look for €2.2bn free cash in 2010
-Net debt could fall to €760m by the end of december and L’Oreal could turn net cash positive next year (€700m).
-According to management acquisitions in emerging markets should remain the priority in the future.

L’Oreal trades at 17.3xP/E and 9.4xEV/EBITDA (excluding Sanofi-Aventis) based on our 2011 estimates. We think such a premium looks justified by its superior visibility but leaves little upside for the next 12 months.

Procter Gamble

Stock price:$59.8
Conclusion: P&G looks in good shape in tough conditions. Market share is up, combined with improved margin. We reconfirm our valuation target of $73-$75 per share.

FY10 results: Sales up 3% (+4% organic) to $78.9bn (+4% Q4)-EBIT +4% (20.3% margin)-Core EPS $3.67 up +6%. Guidance F11: net sales (+4-6% organic) EPS expected to be in the range of $3.91-$4.01 up +7-9%.

Value share up 50bp
Sales growth reached +4% (organic) both for the full year and Q4.
-Growth increasingly driven by volume. Volume growth reached +4% for the year and doubled to +8% in the fourth quarter. Volume in emerging markets are booming (+12%) which was expected. The good news comes from volume in mature markets which increased 5% at a time when most competitors are struggling with lower sales (cf Unilever in Western Europe)
-Value growth held back by lower mix (-1% FY -3% Q4) and to a lesser extent pricing (-1%). Faster growth in emerging markets combined with trading down led to sharply negative mix impact.
- Organic growth accelerated in key categories in Q4, notably beauty or grooming. Fabric care and Home care is the exception with flat sales resulting from a very agressive pricing strategy.

Underlying gain in margin looks strong.
Operating margin was up 30bp for the year, despite the negative impact of higher advertising charges (+120bp).
-Gross margin rose 250bp (+50bp in Q4) providing room for manoeuvre. Costs savings in Q4 (+200bp) added to volume leverage (+100bp) more than offset negative price/mix (-200bp) and higher commodity costs (-50bp).
-We welcome the return to higher advertising spending ($1bn more in F10) in order to support a strong innovation pipeline. SG&A rose sharply in Q4, heavily impacted by marketing expenses, mainly responsible for the decline in profitability. We share management’s view that the profitability should be reviewed on a yearly basis and don’t think one should overplay quaterly variations.

Guidance F11: too high ?
Guidance of +7 to +9% EPS growth might look ambitious in light of the negative impact expected from forex and commodities this year.
-We think top line could slightly exceed F10 performance for two reasons: first, volume will be fueled by the innovations which took place late last year (new Pantene, Fusion Pro Glide..) plus the roll out of brands in new markets in oral care and skin care. Second, pricing could turn neutral for the full year (still negative in H1) as Procter will start annualizing some price decreases (batteries, detergents or paper towel in the US). Mix should continue to hold back sales impacted by further trading down.
-Gross margin could further improve helped by savings from productivity and simplification initiatives ($400m to be invested in F11) while advertising spending could remain stable as a percentage to sales.
-EPS growth will be enhanced (+2-3%) by share buy back estimated between $6-$8bn this year.
We look for $81.7bn sales-$17bn EBIT-core EPS of $3.92 per share (+6.8%).

P&G trades at 15.8xPE based on our calendar estimates, well below its 17x average. We think that accelerating top line and bridging the gap with peers such as best in class Reckitt should help to rerate the stock. Our DCF suggests a valuation closer to $75 per share.

PPR

Stock price:€104.1
Conclusion: We reconfirm that PPR could be worth €115-120 per share, offering 15% upside potential. The marked improvement in retail bodes well for future disposals and further focus on luxury and lifestyle.

Bottom line surprisingly strong in retail
-Top line grew low single digit in H1 held back by subdued demand in France and in Europe. Redcats remained negative, while Fnac grew 3% and Conforama went up 6%.
-Bottom line went up strongly (EBIT up+39% in retail) driven by excellent cost control, sourcing gains and pricing at Conforama and Redcats. According to PPR, the gain in H1 reflects structural improvement both on the revenue and the cost sides implying further progress in profitability in the second half of the year.

Top line growth in luxury and lifestyle slightly disappointing.
-Puma sales declined by 5% in H1, impacted by the restructuring of the retail network, combined with lower promotional sales compared with H1 last year and with inventory related issues. Nevertheless, bottom line was preserved with a 130bp gain in margin in H1 and +4% EBIT. H2 should show a return to growth based on the existing order book.
-Luxury sales rose +8.5% in H1, lagging behind Hermès and LVMH. Gucci group performed well in Asia (+24%) and in Europe (+10%) but suffered in the US with only 2% growth. The management of the Gucci brand in the US failed to reposition the brand. The team has been changed and PPR is now looking for a visible improvement in H2. Bottega Veneta and Yves Saint Laurent performed well in H1 but they are still relatively less exposed than Gucci to Asia. Operating earnings at Gucci group rose +23% posting a 200bp gain to 20% of sales in H1.
According to the CEO F.H Pinault, sales growth could slightly accelerate in H2 in luxury and lifestyle while the trend in retail could remain unchanged. We are now looking for €17.5bn (+5.9%)- EBIT €1668m (9.5% margin) and net results of €917m (up 28% against +16% previously).

PPR trades at 14.3x P/E and 8.1xEV/EBITDA based on our 2010 estimates, implying 25-30% discount to peers in the luxury sector. We think that the strong achievement on the retail side bode well for future disposals. We feel that the stock looks cheap in light of its expected portfolio restructuring and migration towards luxury and lifestyle. Our valuation suggests 15% upside potential.

LVMH

Stock price: €92
Conclusion: Luxury revival coupled with positive forex lead to a strong year. We now look for +35% EPS growth vs +27% previously. We raise our valuation target up to €109-112 per share.

H1: sales up 16% to €9bn (+14% organic H1-+15% Q2) -EBIT +33%-net earnings +53% to €1050m. Management “very confident” but declined to give guidance for the full year.

H2 will slightly decelerate.
-We look for +8% organic sales in H2 driven by Louis Vuitton, the watches and selective retail. Visibility looks lower in wines and spirits. By region, Asia and the US should keep a double digit growth momentum while Europe could slowdown and Japan stay negative.
-Forex impact should increase to +4.5% for the full year (vs +2% in H1), based on current exchange rates.

We look for 21.4% operating margin for the full year (+170bp)
-The gain in H2 should be less pronounced than H1 (+120bp) owing to tougher comps. Margins held up well last year in H2, down only 70bp vs 2008. We also expect advertising and promotion to continue to expand faster than sales (+18% in H1), notably at Moet-Hennessy, Dior and also Louis Vuitton. Last, visibility on administrative expenses remains low following a higher charge than expected in the first half of the year.
-Net earnings could jump 35% to €2.4bn (EPS €5.0) helped by lower net financial income. FCF improved €800m to achieve €1145m in H1. We look for €2.4bn for the year and expect net debt to fall below €2bn by the end of the year.

LVMH trades at 18.4x and 8.9xEV/EBITDA based on our 2010 estimates. Our revised numbers suggest a valuation around €109-112 per share, offering 18%+ upside potential.