Global Food & Beverage: Quality Names to Benefit From a Broadening Rally
Chief Investment Office - Hong Kong3 Apr 2024
  • Global food and beverages companies grew at a faster pace in 2023 on the back of rising ASP but we expect this tailwind to taper off this year
  • Market concerns surrounding GLP-1 (a weight-loss drug) appear misplaced; Consumption shift will be gradual and consumer companies are well-prepared to counter this headwind through differentiated products offering
  • While staple names have lagged high growth companies in performance, they provide stability to portfolios given their defensive characteristics of (a) Stable dividends and (b) Resilience during periods of market volatility
  • We are positive on selected names with strong track record of dividend growth and low volatility
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Strong price hikes buoyed global beverages and packaged food companies in 2023. The high inflationary environment has allowed global non-alcoholic beverages and packaged food (NABPF) companies to grow at a faster pace via price hikes in 2023. NABPF companies generally exceeded quarterly earnings’ estimates with strong top-line growth and margin expansion during the year.

However, we expect the price/mix effects to taper off towards year-end amid pricing concerns among consumers (particularly in US). Indeed, some companies have reported softness in their US sales in 4Q23 amid pushbacks from consumers in the lower income segment. To circumvent the impact of price inflation, consumers are increasingly sourcing from cheaper club retail formats instead.

Revenue growth to normalise in FY24F amid lower pricing and stabilising volume; Minimal near-term impact from weight-loss drug GLP-1. The prevalence of high inflationary pressure underpins the growth outlook for NABPF companies which is guiding for mid-single digit revenue growth and high-single digit EPS growth. Concerns surrounding GLP-1 (a weight-loss drug), meanwhile, appear misplaced.

GLP-1 has dominated headlines in the wake of studies linking its usage to lower snack and sugary beverage consumption. However, consumer companies (such as the likes of PepsiCo and Mondelez) believe that the topic is overblown and the potential consumption shift, if any, will likely be gradual. Additionally, these companies are also taking pro-active steps to counter the headwind by adjusting their servings/pack size and launching healthier alternatives in their product offering.

Quality food and beverages companies to benefit from a broadening rally. NABPF companies have underperformed the market in 2023 as investors rode on the AI bandwagon and embraced technology stocks. Granted that NABPF companies may not see exciting growth ahead, but we believe they still hold a place in a balanced portfolio given their defensive characteristics, such as (a) delivering stable and growing dividends and (b) remaining resilient during periods of market volatility. Indeed, NABPF companies could outperform should the current S&P 500 rally broaden out and investors start rotating into laggards.

 

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