EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Danone Reports Broadly In-Line 2018 Results, Updates Guidance; Shares Fairly Valued

Danone reported full-year 2018 results with like-for-like sales up 2.9% and 2.4% for the 12 months and fourth quarter, respectively, in line with our estimates. Recurring operating margin improved 50 basis points (versus 70 basis points in our model). Management issued fiscal 2019 guidance of around 3% like-for-like growth and above 15% recurring operating margin (versus 3.7% and 15.5% in our model, respectively). Given this broadly in-line set of results, we maintain our EUR 70 fair value estimate and narrow moat rating.

On a more granular view, specialised nutrition was up 1.1% in the fourth quarter (5.9% for the year), with early life nutrition slightly negative, driven by weakness in China (30% of segment's sales) due to the continued decrease in sales from indirect channels while sales in direct channels, including the dynamic mom-and-pop stores, continued to grow strongly. Performance outside China has been healthy, and premiumisation trends in Asia continue apace. EDP Noram sales grew 2.2% (1.5% for the year), supported by a pickup in volume, with fresh foods being the only drag (3.1% excluding that category). Water like-for-like sales were up 5.6% (5.3% for the year), aided by warm weather in Western Europe and price/mix effects (up 4.5%). EDP International was flat for the year (up 2% in the quarter), with Morocco's (boycott) negative contribution amounting to 200 basis points for the year.

Our two main concerns out of this broadly in-line sales update are: (1) a notably negative volume contribution versus historical evidence (negative 0.7% for 2018 versus flat on average during the past five years), with value contribution of 2.9% versus 3.9% on average over the previous five years, and (2) the impact the China slowdown will have on margins, since the region is the highest-margin market of the nutrition segment.