Outgrowing Food & HPC the key to re-rating; we expect this to return in 2021
History has shown a very simple trend for the Consumer Chemicals sector: deliver organic sales growth (OSG) in line with Food and HPC peers, and receive a Food and HPC-like multiple; outgrow those peers, and receive a premium multiple. After significantly outperforming on OSG in 2016-18 (2.5x outperformance), Consumer Chemicals re-rated to a peak premium to the market (100% premium) and to Food & HPC. But two years of underperformance (2019-20) have followed, driving a relative de-rating.
Organic sales growth the key driver of valuation
One of the major drivers for the sector re-rating over the past 20 years, and increasingly so since the Global Financial Crisis (GFC), in our view, has been the growing belief that Consumer Chemicals/Food Ingredients companies can deliver
organic sales growth that is at least on a par with that of the large, listed global Food and HPC companies. Note we use Food and HPC companies as they are the largest end-market exposures for Consumer Chemicals, rather than Beverages and Tobacco (the balance of the Staples sector).
Over 2006-15, Consumer Chemicals companies delivered growth broadly in line with that of listed global Food and HPC companies. Interestingly, however, we saw this turn into consistent outperformance over 2015-18, and at an accelerating rate.
Business model does not determine organic sales growth prospects
There are two business models that operate within the consumer chemicals space; pure-play businesses, which focus on a narrow product speciality, or larger conglomerates with exposure to multiple end-markets. We see no clear correlation between business model utilised and average organic sales growth obtained.
Fiscal policy likely to remain accommodative while monetary policy supportive
The BoJ will probably stay on hold in the next two years, except for adjusting special measures. As described above, fiscal measures to counter Covid-19 were significant in 2020. We would therefore expect expenditures to be much reduced in the coming years. However, our estimate for fiscal drag is smaller than the government and IMF now anticipate.