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FMCG top-players – challenges in challenging times

We initiate coverage of the global FMCG sector and highlight the main issues facing the industry now:

The dollar's strength caused by market expectations of the Fed rate hike. After a period of more than 6 years of low interest rates, investors are concerned if this situation can really change. The change in currencies relative valuation caused the revenues in emerging countries with weaker currencies to decrease while supporting US market. P&G representatives said: "The headwind from foreign exchange has increased since the start of the year. We now expect FX will have a five to six percentage point impact on all-in sales growth". Almost all global FMCG players had similar impact on their business, and further change may have an even bigger influence.

Investors note the China's faltering economy demonstrating the lowest rate of growth since China turning capitalist. China’s demand connected with one-child policy probably will affect FMCG industry, despite the fact there is no specific timetable set to imply such policy. Companies are seen potentially getting benefits if families become larger over the nearest time.

Emerging markets such as China, India and Nigeria are the key to growth as top industry players have large share of revenues and earnings from EM. For example, Colgate has almost 43% of overall combined sales in Latin America and Asia. Such markets demonstrate a steady organic growth but investors need to adjust this growth for the foreign exchange devaluation in some regions. Colgate in Asia had 5% volume growth across the country but the FX negative impact reduced gains only to 2%.

While the industry is already largely established, we see some internal changes too. Acquisitions activity has slowed, resulting in less expenditures of the free cash flow. Moreover, some companies are selling their brands. P&G is now focusing on its core brands, 65 instead of 100, wants to sell Duracell and some beauty brands in the nearest time. We look closely at that as such moves can possibly provide investors with additional cash from dividends.

Overall, we note that our focus will be mainly on large known companies: Colgate, Unilever and P&G. These stocks are not growing very fast right now, and the investors primarily select them for dividends, which are safe even in the current environment. Currently, these companies provide a stable yield in the range of 2 - 4% per year, which make the stocks attractive to portfolio managers searching for high quality dividend-paying stocks. Although, we would not expect to find a rough diamond, we want to show that even such safe opportunities are different and it is important to analyze them.

Be sure to read our report on Unilever following this note.

- AU