Volume growth in the core malted food division continues to slow for GSK, and in our view this is one of the biggest causes for concern for the company in the near to medium term.
Volume growth in the core malted food division continues to slow for GSK, and in our view this is one of the biggest causes for concern for the company in the near to medium term. We believe product substitution, rising competition, slowing rural growth and weak demand in southern markets are hitting the company hard.
Advertising spend has picked up and so has innovation, but we do believe that in a discretionary product, demand revival will be difficult. Consequently, we cut our earnings estimates by 1.1% and 3.2% for FY17F and FY18F respectively on the back of revenue estimate cuts of 10.5%.
GSK Consumer has suffered for the last eight quarters due to poor consumption trends in urban and rural markets. However, with expectations of a strong monsoon coupled with government intervention, food companies are now pointing to initial signs of a recovery, which in our view will help boost volumes.
Continued innovations such as new packet sizes (Rs 10 sachet) and variants such as Growth Plus will allow GSK to be a key beneficiary of this uptick, albeit slowly.
In our SOTP valuation, we value the core operating business at 35x FY18F EPS of R135.7 and cash at book value to arrive at our new TP of R5,510. We retain our ‘neutral’ stance on the stock. While we believe in long-term potential of the malted drinks category and GSK Consumer’s leadership position, near-term earnings are at risk and we would prefer to see a significant pick-up in consumption levels.