Davy Research |
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Flavour and fragrance
Sector fundamentals remain positive in a challenging environment; initiating on Frutarom, Givaudan, Naturex, Robertet and Symrise
21 June 2012
John O'Reilly |
Jack Gorman |
Aiden O' Donnell |
Our fundamental view on the flavour and fragrance sector is positive
A characteristic of modern consumerism is the intense promotional desire for sensory experience and for novelty. This has been a great context for the flavour and fragrance (F&F) sector. If austerity persists and causes a fundamental shift in values, then the growth opportunity in developed markets will be less than in recent decades.
The exposure of F&F companies to developing markets renders the sector highly defensive, with growth here offsetting the threat to demand in many developed markets (e.g. Danone). In our view, relative exposure to strategic positions in developing markets is a key valuation marker.
As events in 2011 showed, the ability to manage increased volatility in input costs is also critical. Our RM (Raw Materials) Index suggests that F&F share price performance is now more correlated with such volatility; the near-term outlook here is positive for margins and thus for the sector.
Sector offers many opportunities for the careful investor; initiating on five flavour and fragrance companies
Our fundamental view on the sector is positive. End market demand is defensive; an emerging market growth opportunity exists; and the more flexible F&F companies will benefit from increased outsourcing of R&D capability in food and non-food markets.
Current valuations reflect much of this positive sentiment so our preferred picks reflect those with the best organic growth potential, margin stability, ROIC strength and competitive positioning.
We initiate with an 'outperform' rating on Symrise and Frutarom and with a 'neutral' rating on Givaudan, Naturex and Robertet.