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Cosmetics 24Th November 2017 Glowing Despite the Challenges Cosmetics

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Cosmetics 24Th November 2017 Glowing Despite the Challenges Cosmetics INDEPENDENT RESEARCH Cosmetics 24th November 2017 Glowing despite the challenges Cosmetics Finalised on 23rd November Despite a relatively competitive backdrop, the global Cosmetics market HENKEL BUY FV EUR139 Bloomberg HNKG<F Reuters HEN3<GY is delivering robust growth (CAGR of 3.8% in the last 10 years). The Price EUR113.1 High/Low 128.9/106.4 drivers are numerous without speaking of e-commerce which is both a Market Cap. EUR46,558m Enterprise Val EUR48,817m PE (2017e) 19.2x EV/EBIT (2017e) 13.8x challenge and an opportunity for the industry. INTERPARFUMS BUY FV EUR36 Bloomberg ITP FP Reuters IPAR.PA The global cosmetics market, valued at around EUR200bn, is a growth Price EUR33.02 High/Low 35.6/22.8363 sector with a 3.8% sales CAGR over the past 10 years according to Market Cap. EUR1,290m Enterprise Val EUR1,114m PE (2017e) 34.8x EV/EBIT (2017e) 19.9x L’Oréal estimates. Furthermore, it is fairly resilient, having even managed positive momentum in 2009 while the luxury goods industry was down L'OREAL BUY FV EUR206 Bloomberg OR FP Reuters OREP.PA close to 10%. Nevertheless, we view it as more and more competitive. Price EUR186 High/Low 195.35/158.6 Market Cap. EUR104,160m Enterprise Val EUR102,315m PE (2017e) 27.9x EV/EBIT (2017e) 21.8x The two main sector growth drivers are i/ an ageing population, BEIERSDORF NEUTRAL FV EUR95 vs. 89 predominantly but not only, in mature countries (and an ageing population Bloomberg BEI GY Reuters BEIG.DE means higher consumption of cosmetics products per capita, at a higher Price EUR97.259 High/Low 98.55/75.529 Market cap. EUR22,058m Enterprise Val EUR19,484m price) and ii/ a growing middle class, especially in emerging markets. PE (2017e) 28.3x EV/EBIT (2017e) 17.6x UNILEVER NEUTRAL FV EUR49 Nevertheless, the industry is having to face new challenges which may Bloomberg UNc.AS Reuters UNA.NA Price EUR186 High/Low 195,35/158,6 even become opportunities if correctly managed: i.e. i/ retailer pricing Market Cap. EUR140,829m Enterprise Val EUR102,315m pressure, an increasing proportion of e-commerce which currently PE (2017e) 21.8x EV/EBIT (2017e) 17.1x ii/ accounts for 7% of the total market with growth of around 19% per year, and iii/ new developments in consumption with the emerging trend 23/11/17 towards more natural products. 123 118 This report includes the five companies under our coverage, Henkel 113 (Buy- FV: EUR139), Interparfums (Buy-FV: EUR36), L’Oréal (Buy- FV: 108 EUR206), Beiersdorf (Neutral -FV: EUR95) and Unilever (Neutral- FV: 103 EUR49). We view L’Oréal as the best placed to benefit from all the 98 industry opportunities. We also argue the case for Henkel as an attractive Source Thomson Reuters investment, particularly thanks to its growing adhesive business, “margin STOXX EUROPE 600 PERS & H/H GDS E STOXX EUROPE 600 story” and healthy balance sheet. Analyst: Loïc Morvan Virginie Roumage, CFA 33(0) 1 70 36 57 24 33(0) 1.56.68.75.22 [email protected] [email protected] Sector Analyst Team: Nikolaas Faes Clément Genelot Antoine Parison Cédric Rossi r r Cosmetics Table of contents 1. A growing market ............................................................................................................................. 3 1.1. A 3.8% CAGR over the last 10 years… ............................................................................................... 3 1.1.1. Asia and North America are the two most important regions ........................................... 4 1.1.2. Skin care is the leading product category ............................................................................... 5 1.1.3. The mass market is by far the most important channel ...................................................... 6 1.2. …Thanks to two main drivers ............................................................................................................... 8 1.2.1. An ageing population in the mature countries ...................................................................... 8 1.2.2. A booming middle class expected in the emerging markets ............................................... 9 2. Challenges and opportunities ....................................................................................................... 11 2.1. Retailer pressure ..................................................................................................................................... 11 2.1.1. Consolidation and price war in Europe................................................................................ 11 2.1.2. The shadow of a price war is overhanging .......................................................................... 12 2.2. Digital and e-commerce ........................................................................................................................ 13 2.2.1. Strong potential for online beauty ......................................................................................... 13 2.2.2. Are e-commerce giants really a threat to the beauty players? ........................................... 15 2.3. New trends of consumption ................................................................................................................ 16 3. Strengths & weaknesses ................................................................................................................ 18 3.1. L’Oréal is the best placed cosmetic group ......................................................................................... 18 3.2. L’Oréal: a true global player… ............................................................................................................. 19 3.3. Henkel: complicated positioning in the current environment ....................................................... 21 3.4. Unilever: squeezed between local competition in emerging and price competition in developed markets ............................................................................................................................................. 23 3.5. Beiersdorf is a strong niche player! ..................................................................................................... 25 4. Valuation .......................................................................................................................................... 28 4.1. Price performance .................................................................................................................................. 28 4.2. Valuation comparison............................................................................................................................ 28 4.3. DCF models ............................................................................................................................................ 29 4.3.1. Beiersdorf (Neutral- Fair Value: EUR95) ............................................................................ 29 4.3.2. Henkel (Buy- Fair Value: EUR139) ...................................................................................... 29 4.3.3. L’Oréal (Buy- Fair Value: EUR206) ...................................................................................... 31 4.3.4. Unilever (Neutral- Fair Value: EUR49) ................................................................................ 32 Beiersdorf Fair Value EUR95 vs. EUR89 NEUTRAL ................................................................. 33 A pure skin care player! ..................................................................................................................................... 33 Henkel Fair Value EUR139 BUY ..................................................................................................... 35 Confidence after a good Q3 for adhesives .................................................................................................... 35 Interparfums Fair Value EUR36 BUY............................................................................................. 37 An efficient business model ............................................................................................................................. 37 L'Oréal Fair Value EUR206 BUY .................................................................................................... 39 Ready to explore the digital opportunity! ....................................................................................................... 39 Unilever | Fair Value EUR49 NEUTRAL ..................................................................................... 41 Too busy .............................................................................................................................................................. 41 Bryan Garnier stock rating system .................................................................................................... 43 Cosmetics 1. A growing market The fast-growing global Cosmetics market is valued by L’Oréal at around EUR200bn, having delivered a 3.8% CAGR over the last 10 years according to L’Oréal estimates. Even in 2009, a nightmare year for the world economy, this market enjoyed 1% growth followed by a strong 4.2% growth in the following year. This note highlights that the market dynamism varies depending on the region, product segment and distribution channel. Furthermore, it is driven by demographic metrics, including an ageing population in mature markets and an expanding middle class in emerging markets, especially in Asia-Pacific. Cosmetics market has enjoyed a 3.8% CAGR over 1.1. A 3.8% CAGR over the last 10
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