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Unilever - Margin gains boost profits

George Salmon | 20 July 2017 | A A A
Unilever - Margin gains boost profits

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Unilever plc Ordinary 3.11p

Sell: 3,906.50 | Buy: 3,908.00 | Change -15.50 (-0.40%)
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Unilever's first half results show a 14.4% increase in underlying earnings per share, boosted by a 3% rise in underlying sales and a 1.8 percentage point increase in operating margins. The reported figure also includes a 2.6% bump from favourable exchange rates. The shares rose slightly on the news.

Our view

Unilever has delivered a stellar performance in the last few years, backed by a juicy combination of increasing profit margins, sales and dividends.

A multi-billion pound advertising budget means that its products remain in high demand, giving the group reliable revenues. Some Emerging Markets look more difficult in the short term, but Unilever's exposure to a growing and increasingly wealthy customer base in these areas should be a long term tailwind.

In February, Kraft Heinz shocked the market with a £115bn takeover bid. While Unilever's frosty response meant the notion of a consumer goods mega-merger evaporated almost as quickly as it appeared, the bid looks like it has raised investors' expectations. Indeed, it was only a matter of weeks before CEO Paul Polman released plans to shake up the business. The main features were higher dividends, more share buybacks and aggressive plans on margin growth.

First half results show progress is being made, and Unilever expects growth to accelerate in the rest of the year, driven by innovations and a step-up in marketing investment. Underlying operating margin this year is now set to improve at least 1 percentage point, with sales increasing by 3-5%.

The restructure also includes a decision to split out the Spreads business. Brands such as Flora and Stork have become something of a millstone around the group's neck. The future of the division is still unclear, but a sale could bring in around EUR6.5bn.

The group's plan to step up shareholder returns means leverage is rising, with net debt expected to be around 2 times EBITDA (earnings before interest, tax, depreciation and amortisation). However, this should be sustainable for a group with such consistent revenues, especially if the plans to increase margins and cash flow can be delivered in full.

For now, the shares offer a prospective yield of 3.2% and trade on 21.5 times expected earnings, which is above the group's historic average.

Half year results

Trends in both volumes and sales were consistent across the first and second quarters. Operating margins improved by at least 1 percentage point in all divisions, with each delivering low to mid-single digit sales growth. However, with volumes flat, this was driven by price increases.

The refreshments business was the strongest performing category, with a strong showing from the group's ice cream brands, which include Ben & Jerrys, Magnum and Cornetto. Home and Personal Care were in-line with the overall group trends, with sales up 2.8% and volumes up 0.3%. Even after stripping out the spreads business, the Foods division was the weakest division, with sales up 2% and volumes down 0.7%.

Several key markets remain challenging, including Brazil and many European countries, however China and Australia delivered stronger performances. Overall, Emerging Markets, which are of the single largest contributor to group sales, saw growth of 5.5%, driven by a 5.1% increase in prices. Sales and volumes in Developed Markets both dipped 0.4%, as the spreads business weighed on both Europe and North America.

Paul Polman, Unilever CEO said the Connected 4 Growth change programme ,which started in the autumn of 2016, is delivering ahead of schedule, helping to keep the group on track for another year of sales growth ahead of Unilever's competitors.

Unilever features in our recent article: 'Five shares for dividend growth'

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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