Wednesday 15:00 GMT
● Beiersdorf of Germany led European consumer goods makers lower after the Nivea producer reset margin targets to reflect a multiyear investment programme aimed at reviving growth. Stefan De Loecker, the group’s new chief executive, announced plans to spend an additional €70m-€80m annually on its consumer business, meaning divisional margins this year would be 14-14.5 per cent rather than the 15.9 per cent expected by the consensus.
Analysts saw a 10 per cent cut to Beiersdorf’s 2019 earnings as a result.
“This margin reset comes after many similar events in the industry over the past few months, and marks a necessary pivot towards a more traditional growth agenda after years of what had been seen as too extreme a cost-cutting. That said, this may thus put pressure via negative read across on the very few names [that have] stuck to their margin targets or high profitability levels.”
Beirsdorf joins Henkel and Colgate-Palmolive as having all cut margin targets to fund investment.
“This is bound to up the ante for Unilever, who compete with all three of the resetters in big categories like skincare, haircare, dentifrice and laundry,” said Jefferies. “We therefore expect the credibility of Unilever’s 2020 margin target to be the subject of even greater debate.”
Wopke Hoekstra, the Netherlands’ finance minister, said the move was a “fundamental step toward protecting Dutch interests”, adding that “several times in recent years the Dutch interest was not given enough weight in important decisions for the company as a whole”.
“The hiring of a non-French chief executive to head the group was a clear positive in representing a commitment from France to allow the group to be run on a commercial basis to try to achieve industry-standard profitability at Air France in particular . . . However, the will of the Netherlands to play a bigger role in strategic decision-making raises the risk of political interference in the running of the group.”
Separately, Morgan Stanley downgraded Air France-KLM to “equal weight” on valuation grounds.
● Marks and Spencer plunged on a surprise dividend cut. The retailer said it would reduce its final payout from 11.9p to 7.1p while announcing a £600m rights issue to fund its purchase of half of Ocado’s UK food deliveries business.
Jefferies downgraded M&S from “buy” to “hold”. Not only was the Ocado deal a “very expensive way for M&S to defend food volumes”, the dividend cut and funding structure raised broader concerns about earnings visibility, ambitious synergy targets and return on investment, it said.
“Ocado UK has grown sales by circa £1bn in the past decade (at reducing [operating] margins). It remains a great customer offering, but with very skewed demographics. We don’t see the replacement of Waitrose with M&S as changing that brand appeal. And as a result we don’t feel bullish about the potential for M&S to supercharge its food growth via the joint venture.”
● Capita was the FTSE 250’s biggest gainer amid market rumours of a disposal. Analysts have speculated that the outsourcer remained open to selling parts of its Specialist Services division, which provides about a quarter of group revenue.
● Metro Bank hit a record low after setting out plans to slow growth and raise £350m via a rights issue. With full-year results that were no worse than flagged in a January profit warning, Metro scrapped its 2020 profitability target, reduced guidance for returns by 2023 and tempered medium-term ambitions for deposit growth and branch expansion. The lender also warned that it did not expect to get regulatory approval before 2021 to use its own estimates for credit risk, two years later than planned.
“The visibility of Metro Bank’s investment case is further reduced. And with the medium-term targets being five years out, we remain uncertain over the level of equity required to achieve these targets. The slower growth and higher than expected equity raise (£350m versus £200m in our estimates) implies that our returns will be further diluted.”
● HSBC downgraded Moncler and Prada to “hold” from “buy” as part of a European luxury goods sector review. Its overall thesis was for multi-brand, diversified groups such as LVMH, Richemont and Kering to outperform while single-brand companies faced growing pressure.
The likes of Moncler and Prada were risky investments “as fashion, by its essence, comes and goes. In that context, diversity offers a natural hedge,” it said. “The only exceptions we see to that rule are Hermès, for which in some categories demand exceeds supply and Chanel, for which there is a perception of timelessness.”
Prada would find it “harder to sustain strong top-line growth at a time when Louis Vuitton and Gucci are dominating the space”, HSBC added.
On Moncler, the broker applauded its “best-in-class execution, creative projects and store expansion, driven by a solid bench of managers”. But a valuation of 24.5 times 2019 earnings was high enough given challenging year-on-year comparisons in the first half.
● RBC downgraded Royal Dutch Shell to “sector perform” and advised a switch into Total, which was raised to “outperform” with a €60 target price. The broker argued that Shell’s reserve life was shorter than peers and dividend costs hobbled its ability to build out the portfolio with acquisitions.
“With ongoing uncertainty in the macro landscape and energy transition, we see Shell’s dividend as too much of a burden over the medium term, meaning Shell’s buyback is out of necessity, not choice . . . At today’s share price we think Shell needs at least another $30bn in buybacks in order to reduce its dividend burden to a sustainable level. We think the need to complete a buyback out to 2025 could limit its options to high-grade its portfolio over time.”
Total, by contrast, has one of the most diverse portfolios of growth projects in the sector, as well as the strongest free cash flow generation, yet trades at a lower valuation than most of its peers, RBC added.
● In brief: Auto Trader rated new “sell” at Stifel; Bluefield Solar raised to “buy” at Investec; EssilorLuxottica cut to “equal-weight” at Morgan Stanley; Freenet upgraded to “hold” at Berenberg; Icade downgraded to “underweight” at Barclays; Meggitt cut to “neutral” at JPMorgan; Munich Re cut to “neutral” at Goldman Sachs; Smurfit Kappa downgraded to “hold” at Goodbody; Technogym rated new “buy” at Citigroup; Tullow downgraded to “hold” at Jefferies; Unicaja Banco rated new “buy” at Berenberg.
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