Company Reports

Unilever's first-quarter sales update showed underlying sales growth of 4.4%, ahead of company-compiled consensus of 3%. Growth was driven equally by volume and pricing, with the former up 2.2%, driven in turn by beauty's strong outperformance, up 7.4%.

In an ad-hoc press release March 19, Unilever announced its intention to separate its ice cream business, the launch of a productivity program, and, as a result, higher medium-term guidance. More specifically, the group cited ice cream's different operating model, such as supply chain and point of sale that support frozen goods, a different channel landscape, more seasonality, and greater capital intensity as catalysts for the board's decision. The full separation is expected to be completed by the end of 2025. The stand-alone ice cream business will be the largest ice cream company in the world with a 20% market share and double the size of the second largest player. The business, which delivered a turnover of EUR 7.9 billion in 2023, will also have five of the top 10 selling global ice cream brands (Ben Jerry's, Magnum) with exposure both in-home and out-of-home globally. In conjunction with these portfolio changes, Unilever will be launching a productivity program that is expected to deliver total cost savings of around EUR 800 million over the next three years, more than compensating for the estimated dis-synergies from the separation, with net savings expected to be invested in research and development and brands, and also support margin improvements. Associated restructuring costs of proposed changes (7,500 office roles will be impacted globally) will be around 1.2% of group sales for the next three years (up from 1% previously communicated). Finally, after the separation, Unilever expects to deliver mid-single-digit underlying sales growth (versus 3% to 5% previously) and modest margin improvement (in line with previous guidance). Shares traded around 3% higher at the time of writing. We maintain our fair value estimates for Unilever of EUR 52/$56/GBX 4,380 with minor changes due to currency movements. Unilever is one of our top picks in the space.

Although Unilever exhibited strong top-line performance during the coronavirus, the primary factor behind this was pricing in response to inflationary pressures and low demand elasticity in key categories. While we anticipate pricing to remain a driver of top-line growth in 2024 and beyond, its impact should diminish in subsequent years. As the company shifts focus toward volume growth and mix, we expect organic growth to decelerate below 4% by the end of our explicit forecast period.

Unilever's fourth-quarter and full-year 2023 results showed underlying sales growth of 4.7% and 7%, respectively, in line with company-compiled consensus and our estimates. In the fourth quarter, as expected, growth was propelled by volumes and price increases, with volumes up 1.8%, driven in turn by beauty's strong outperformance, up 6.3% versus 3.5% in our model, the result of higher marketing and overhead investments. Margins improved by 60 basis points during the year with the gross margin up 200 basis points and increased investments in 30 power brands (75% of sales) consuming 130 basis points, in line with its new strategy. This was highly anticipated and heavy in the second half as lower raw materials inflation enabled the group to reinvest a big chunk of gross margin gains into marketing to reinvigorate volumes. Management introduced fiscal 2024 organic growth guidance of 3%-5% versus 3.6% for consensus (prerelease), and 4% (unchanged) in our model. On profitability, Unilever expects a modest improvement for the full year, up 24 basis points in our model and lower than company-compiled consensus of 40 basis points. All in all, it was a good close to the year with fourth-quarter volumes that grew across the board except for Europe and ice cream due to higher elasticities and consumer downtrading to value formats as well as less favorable summer weather versus 2022. Core categories performed well; both beauty and wellbeing, and personal care grew volumes in Europe, despite widespread consumer downtrading across several categories, which reflected robust elasticities and brand strength. Given the in-line growth number and guidance for the full year, our fair value estimate for Unilever is unchanged at EUR 52/USD 56/GBX 4,560, with minor adjustments for currency movements. Shares are undervalued.

Unilever's third-quarter trading update showed sales growth at 5.2%, in line with company-compiled consensus of 5.2%. Although the headline growth number came in as expected, the driver was pricing, which was up 5.8% (versus 5.1% for consensus), with volumes being down 0.6% versus expectations for up 0.1%. Since volume growth, which is more maintainable long-term and contributes to durable margin improvement—admittedly a higher-quality growth driver than pricing (merely passing on input cost inflation—came in lower than expectations, the share price reaction this morning was somewhat negative, down about 3% at the time of writing. That said, management maintained fiscal 2023 organic growth guidance to higher than 5% versus 7.1% for consensus (prerelease), and 6.7% (unchanged) in our model. On profitability, Unilever continues to expect a modest improvement for the full year (up 37 basis points in our model, in line with company-compiled consensus). Net material inflation for 2023 is expected at about EUR 2 billion, of which EUR 0.4 billion in the second half, implying a significantly lower need for price rises in the second half (up about 3.5% in our model).

Although Unilever exhibited strong top-line performance during the coronavirus, the primary factor behind this was pricing in response to inflationary pressures and low demand elasticity in key categories. While we anticipate pricing to remain a significant driver to top-line growth in 2023, its impact should diminish in subsequent years. As the company shifts focus toward volume growth and mix, we expect organic growth to decelerate below 4% by the end of our explicit forecast period.

Unilever reported solid sales growth in the first half at 9.1%, ahead of company-compiled consensus of 8.3%, with volumes and pricing driving the beat (volumes down 0.2% versus down 0.7% for consensus, pricing up 9.4% versus up 9% for consensus). Management upgraded fiscal 2023 organic growth guidance to higher than 5% versus the upper end of its 3%-5% medium-term range previously, 6.1% for consensus (prerelease), and 6.7% in our updated model. The underlying operating margin was higher at 17.1% versus consensus' 16.2%, with Unilever continuing to expect a modest improvement for the full year (up 37 basis points in our model). Net material inflation for 2023 is about EUR 2 billion, of which EUR 0.4 billion is expected in the second half, implying a significantly lower need for price rises in the second half (up about 3.5% in our model).

Although Unilever exhibited strong top-line performance during the coronavirus, the primary factor behind this was pricing in response to inflationary pressures and low demand elasticity in key categories. While we anticipate pricing to remain a significant driver to top-line growth in 2023, its impact should diminish in subsequent years. As the company shifts focus toward volume growth and mix, we expect organic growth to decelerate below 4% by the end of our explicit forecast period.

Although Unilever exhibited strong top-line performance during the coronavirus, the primary factor behind this was pricing in response to inflationary pressures and low demand elasticity in key categories. While we anticipate pricing to remain a significant driver to top-line growth in 2023, its impact should diminish in subsequent years. As the company shifts focus toward volume growth and mix, we expect organic growth to decelerate below 4% by the end of our explicit forecast period.

Unilever reported strong sales growth in its first-quarter trading update at 10.5%—well ahead of company-compiled consensus of 7.2%, with volumes driving the beat (volumes down 0.2% versus down 3.2% for consensus). Management upgraded guidance to the upper end of its 3%-5% medium term range versus "upper-half" previously. This compares with 4.7% in our model and around 5% for consensus. Better volume performance was largely driven by pipeline fill from retailers ahead of the summer season in the deodorant category. On the call, management said that had it not been for this "restocking" boost, group volumes would have been between minus 1% and minus 2%, a resilient performance that is still ahead of expectations. From a product category perspective, beauty & wellbeing was the standout performer given resilient volumes up 2.6% and organic growth up 9.6% with personal care a close number two, at similar organic growth rates and solid volumes (about flat if one accounts for the pipeline fill one-off in deodorants). Ice cream exhibited the worst performance in volumes, as expected, given the category's discretionary nature, with pricing (up 10.5%) taking a toll on volumes (down 4.1%). Similarly but at a lesser extent, home care and nutrition reported negative volumes (down 2.8% and 1.3%, respectively) as pricing (up 13.4% in both categories) put the consumer, especially in Europe, under pressure, with management commenting on trading-down activity to lower-priced products and private label gaining share in these categories. All in all, a strong trading update, even adjusting for the deodorant pipeline refill one-off, with volumes improving sequentially (adjusted volumes down 1% to 2% versus down 3.6% in the fourth quarter). We remain cautious as some of Unilever's categories are experiencing increased competition from private label and down-trading activities. We don't expect to materially change our EUR 50/$55/GBX 4,430 fair value estimates. Shares are fairly valued.

We are transferring coverage of Unilever with a EUR 50 per-share fair value estimate (GBX 4,430 for London-traded shares and $55 per ADR). We maintain Unilever's wide moat and stable moat trend ratings.

Although Unilever exhibited strong top-line performance during the coronavirus, the primary factor behind this was pricing in response to inflationary pressures and low demand elasticity in key categories. While we anticipate pricing to remain a significant driver to top-line growth in 2023, its impact should diminish in subsequent years. As the company shifts focus toward volume growth and mix, we expect organic growth to decelerate below 4% by the end of our explicit forecas period.

Amid fragmentation in consumer tastes as well as in retail and marketing channels, along with lower barriers to entry for startups, most consumer staples multinationals are fighting strong organic growth headwinds, and many are cutting costs in order to spend to drive growth. With value growth in most categories currently running at little more than 2%, not all of the large caps will be successful in regenerating growth to the 4%-5% they used to enjoy. In the case of Unilever, while we think the management team is taking the right steps to optimize its investments in its business, we expect growth to remain sluggish in the company's competitive categories.

Unilever reported better fourth-quarter revenue and earnings than we had expected, in an impressive performance given the multitude of macroeconomic challenges the company faces. This performance has minimal impact on our valuation, however, and we are retaining our EUR 50 fair value estimate for the Amsterdam-traded shares. The results increase our conviction that there is modest upside to Unilever's valuation, as at the close of business on Feb. 8.

Unilever reported strong sales growth numbers in its third-quarter trading update, and management provided full-year organic sales growth guidance of above 8%. On this evidence, it appears sales growth will be stronger than we had expected perhaps until the company cycles these high price increases early next year. Unilever does not provide margin data in its third-quarter report, and we suspect operating profit growth will continue to be anemic in the second half of the year, so we are lowering our margin assumptions slightly and reiterating our EUR 50/GBX 4,300/$51 fair value estimate. Our wide moat rating is unchanged. Unilever's total returns have been lackluster in recent years, and we consider the stock to be slightly undervalued. However, we think the investment case depends on potential restructuring and an improvement in financial performance that may occur when the new CEO is put in place; visibility into medium-term strategy is very limited.

Unilever announced that CEO Alan Jope intends to retire by the end of 2023 after what will have been five years in the top job. While this had not been expected, we do not find Jope's exit to be too surprising, coming as it does in the aftermath of the failed acquisition of GSK's consumer health division (now Haleon) and barbed criticism from shareholders including Fundsmith in recent months, while Trian Partners has taken a seat on the board. Jope has overseen a period of lackluster operating performance and the shares are materially unchanged since his assumption of the role in January 2019. We believe Unilever is a wide-moat business with modest valuation upside potential, but we think the incoming CEO will have to make significant changes to Unilever if the stock is to rerate to the multiples being awarded to consumer product businesses in more advantaged categories.

Unilever’s first-half operating income of just over EUR 4.5 billion was right in line with our forecasts, and we maintain our EUR 50 fair value estimate for the Amsterdam-traded shares. So far, we think Unilever is navigating the challenges of inflation fairly well, and consumers appear to be absorbing higher prices, but significant risks remain for manufacturing and distribution costs in the second half of the year. Although Unilever’s market value has recovered from its recent lows, there remains upside to our valuation of the wide-moat business.

Amid fragmentation in consumer tastes as well as in retail and marketing channels, along with lower barriers to entry for startups, most consumer staples multinationals are fighting strong organic growth headwinds, and many are cutting costs in order to spend to drive growth. With value growth in most categories currently running at little more than 2%, not all of the large caps will be successful in regenerating growth to the 4%-5% they used to enjoy. In the case of Unilever, while we think the management team is taking the right steps to optimize its investments in its business, we expect growth to remain sluggish in the company's competitive categories.

Trian Partners, led by Nelson Peltz, has accumulated a 1.5% stake in Unilever and taken a seat on the board, in a move that we believe could finally be the catalyst to unlock value at Unilever. Even after the very positive market reaction to the news, Unilever was trading at more than 10% discount to our fair value estimate as at the close of business on May 31, and it appears to us to be one of the more attractive investment opportunities in the developed market fast moving consumer goods, or FMCG, sector at present. When stripping out Unilever’s 62% economic interest in Hindustan, which we estimate represents around 25% of its enterprise value, the remaining assets of Unilever are trading at just 11 times EV/EBITDA, below other developed market FMCG companies. We retain our EUR 50 fair value estimate and wide moat rating.

Unilever reported respectable first-quarter sales that could have been a lot worse given the multitude of challenges it currently faces, and we think shareholders will take comfort from the robustness of consumer demand in the face of steep price increases. We have tweaked our assumptions slightly, but retain our wide moat rating and EUR 50 fair value estimate. Although Unilever operates in some highly competitive categories in which the consumer has historically been relatively price sensitive, the expectations being priced into the stock are currently very low, and we think the current market valuation offers an attractive risk/reward proposition.