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Unilever - Q3 sales rise, but costs up too

George Salmon | 18 October 2018 | A A A
Unilever - Q3 sales rise, but costs up too

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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 third quarter revenue has fallen 4.8% to EUR12.5bn. However, underlying sales rose 4.5% after excluding headwinds of 5.2% from adverse exchange rate movements and 3.3% from M&A activity - including the sale of the cEUR800m a quarter Spreads business.

Still, much of the improvements arose from higher than usual inflation, as the group passed on increased commodity costs. That means top line performance is slightly behind consensus forecasts.

The shares dipped 2% on the news.

The quarterly dividend is set at 33.93p per share, up from 31.99p last year.

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Our view

The unexpected about turn on moving to Rotterdam was less than glamourous, but it doesn't alter the fundamental attractions of Unilever's business.

The group sells everyday household items like Dove, Magnum and Persil. These items fall into the 'little and often' category, so are typically not that vulnerable to the ups and downs of the economy.

Marketing has been key to ensuring more customers check out with plenty of Unilever products in the trolley. Building strong brands also enables prices to rise, in turn boosting margins and profits. A good chunk of profits are then reinvested in the following year's marketing budget.

Consistently repeating this cycle has led to impressive shareholder returns, and Unilever plans to boost profitability even further with cost-saving plans. The dividend is comfortably covered by earnings and cash flows, and we think there's clear potential for the payout to increase, although as always there are no guarantees. At the time of writing the prospective yield is 3.6%.

While other consumer goods groups share these characteristics, Unilever's emerging markets exposure separates it from rivals. Weak sales growth on the back of economic strife in South America is a reminder these can be volatile. But Unilever's wide range of markets means it can weather difficult conditions in a handful of geographies, while growing and increasingly wealthy populations in EM nations should be a long term tailwind.

The shares trade on 18.9 times expected earnings, a premium to the historical average, but below the more lofty valuations we've seen of late. That makes the decision to return EUR6bn in proceeds from the spreads business as a share buyback rather than a special dividend seem sensible to us.

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Third quarter trading update:

Underlying sales growth (USG) was boosted by sales volumes and pricing growth in each of the group's major segments: Beauty & Personal Care, Home Care and Foods & Refreshment. Each delivered USG of between 3.2% and 4.5%, with Dove, Cif and Magnum all highlighted as good performers.

Geographically, Developed Markets saw USG of 1.3%. Hot weather ensured sales of ice creams were strong in Europe, while new Beauty & Personal Care brands in North America were strong.

In Emerging Markets, USG was 5.6%, led by Asia, Africa, the Middle East and Eastern Europe. Latin America was a mixed bag, with Argentina's hyperinflationary environment leading to sharp volume declines. In Brazil, sales rose 10%, helped by a resolution to the truckers' strike and a return to positive price growth.

Unilever CEO Paul Polman said "We are progressively reaping the benefits of our Connected for Growth programme, which is now well embedded throughout the organisation, making us simpler, faster and better connected with our consumers...We continue to expect underlying sales growth in the 3% - 5% range, an improvement in underlying operating margin and strong cash flow."

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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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