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We increased our price target on Danone from €72 to €77. We remain optimistic about Danone for the following reasons:
• Sales – We are expecting sales to grow by 4% in 2018, 2019 and 2020 respectively. We believe this growth rate is achievable given the improvement in demand we are seeing for the Group’s products from most regions (except for Brazil, which remains weak). We like Danone’s portfolio of products because it is 100% made up of healthy products and 80% of its brands can be used in daily consumption
• China – the group is seeing strong demand from China in 2017, the Group continues to remain optimistic about sales in this region with particular reference to the demand for water which is increasing strongly
• Dividend – Management increased the dividend by 12%. The shares are now trading on an indicative gross dividend yield of 2.83%. We believe this dividend is sustainable and could also be increased in the future as the Group is expected to continue to increase its cash flow
• Growth in earnings – The Group has delivered double digit growth in earnings over the last three years. We expect the trend to continue (except for 2018 though this is only because in 2017 the Group paid lower taxes)
• EBIT margin – Management is targeting an EBIT margin of 16% by 2020. We believe this is achievable as the Group will benefit from synergies and cost savings in the years ahead. We are forecasting an EBIT margin of 16.5% by 2020. We believe Danone is well positioned to see margin growth in years ahead. We see a margin recovery emerging, spread over many years, supported by margin-enhancing growth in waters and baby food over the medium term, and European dairy margins
• Earnings – we are forecasting EPS figures of €3.75 and €4.11 in 2018 and 2019 respectively, in line with guidance
• Cost cutting – Danone has a cost cutting program underway. Called Program PROTEIN, the aim is to eliminate €1bn of indirect costs, i.e. from €8bn to €7bn by 2020
Outlook
We believe shares in Danone are attractively priced and investors should have an allocation to the stock in a well-diversified portfolio. We are confident that management will continue to deliver higher profits, which should be supported by an increasingly credible savings plan.
About the Company
Danone is a French multinational food-products company, operating in more than 130 countries worldwide and across fresh dairy products, waters, early life nutrition and medical nutrition. Notable brands within the group portfolio include Activia, Oikos, Evian, SGM and Aptamil.
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