Stockbroking house Citi says infant formula and premium milk group The a2 Milk Company is in strong shape and best-positioned among ASX food and beverage stocks to withstand the sharemarket rout, and could deliver potential gains of 30 per cent once the crisis has passed.
But Citi has a »sell» rating on both Domino’s Pizza and soft drinks group Coca-Cola Amatil even though the food and beverage sector is expected to be among the most resilient parts of the economy as normal patterns of life are disrupted because of the coronavirus outbreak.
Rival stockbroker Macquarie has a different view however, and upgraded both Coca-Cola and Domino’s to an »outperform» rating. Macquarie says «Coke has proved to be a resilient consumer staple through crises in the past», even though there is a structural decline for demand in the product. It also believes pizza is a »cheap enough treat for people» and Domino’s home delivery could prove attractive for people who don’t want to go out to restaurants.
Citi analyst Craig Woolford says a2 Milk has a strong balance sheet with a net cash position of $800 million, modest operating leverage and »strong supply links to China that should result in continued sales momentum».
It has a 12-month price target of $19.20 on the stock. A2 Milk shares were down 8 per cent in early trading on Friday but staged a dramatic recovery to close 6 per cent higher at $15.71.
Citi also believes Asaleo Care, the maker of Libra feminine hygiene products, Tena incontinence products and which operates the Tork workplace hygiene range, is also a safe bet. It has a »buy» rating on Asaleo and expects its share price to be at $1.30 in a year’s time.
Asaleo sold the Sorbent toilet paper operations in 2018 to Solaris Paper to cut debt and exit a low-margin business, and hasn’t been able to participate in the frenzied buying of toilet paper by shoppers which has stripped supermarket shelves at Coles, Woolworths and Aldi. But Asaleo still has a consumer tissue business in New Zealand.
Mr Woolford says the changing demand trends following the outbreak of coronavirus means that food and beverage businesses with exposure to grocery sales should be in a solid position as people »prefer to stay at home», with some stockpiling of long-life dry grocery products.
But businesses with a large exposure to the food service and hospitality industry, particularly restaurants and pubs, will suffer from lower foot traffic.
Citi has a »sell» rating on both Coca-Cola Amatil and Domino’s and Mr Woolford says »both are highly priced stocks for the level of growth» they offer.
He said Coca-Cola Amatil’s 2019-2020 profits »should be very resilient given lower commodity costs» but this won’t be a source of growth in the following year.
It has a 12-month price target on Coca-Cola of $10.60, and for Domino’s its projection is $49.80 in a year’s time.
Citi also has a «buy’ rating on chicken processor Inghams, and a 12-month price target of $3.90 on the group.
Citi has some concerns about Penfolds and Wolf Blass owner Treasury Wine Estates and a »neutral» rating on the stock because of the uncertainty about its high-margin sales in China in the wake of the coronavirus outbreak.
Citi has a 12-month target price of $12.30 on Treasury Wines. Treasury, which has downgraded profits twice in the past few weeks, derives about 40 per cent of its profits from China, its most lucrative market which fuelled a quadrupling of its share price over several years to more than $19 by late 2019.
Mr Woolford said he was »cautious» on Treasury despite its big share price falls in the past two months. Bank of America analyst David Errington last week calculated that Treasury Wines business was worth about $20 per share should be it be broken up.