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.