Investec names AB Foods and Unilever as key picks in consumer staples sector

Shares in Associated British Foods (ABF) and Unilever were making decent gains on Tuesday after broker Investec named the two stocks as its top picks in the European consumer staples sector.

Analysts Alex Smith and William Cuss gave both companies a ‘buy’ rating, setting target prices of 3,650p for ABF and 3,160p for Unilever.

They said that the sector is “structurally advantaged” with the combination of stable cash flows in developed markets supporting the expansion of emerging markets.

Smith and Cuss said: “The sector is enviably populated by well diversified companies with strong global, category and market leading positions. Leverage of scale and capability should allow these positions to consolidate whilst tapping into favourable category development trends in emerging markets (rising penetration, frequency of consumption and premiumisation).”

Nevertheless, they pointed out that stocks in the sector are current trading on a 10-year high, with price-to-earnings multiples at 21.5 on average.

“We see the risk reward on Primark’s US entry to the upside for ABF. Meanwhile at Unilever, we expect raw material tailwinds to provide the flexibility to deliver better than expected margin progression and/or a stronger reinvestment led volume growth recovery.”

On the other hand, the broker named Reckitt Benckiser and L’Oreal as its key ‘sells’ due to a “mismatch between growth and valuation”.

ABF was trading 1.5% higher at 3,131p by 10:43, while Unilever gained 1.3% at 2,911.5p.