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Unilever - staying put after all

George Salmon | 5 October 2018 | A A A
Unilever - staying put after all

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Unilever plc Ordinary 3.11p

Sell: 4,315.50 | Buy: 4,317.00 | Change -17.50 (-0.40%)
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Unilever has abandoned plans to become a single legal entity incorporated in Rotterdam.

That means the group's current structure as two separately listed entities, an N.V. holding listed in the Netherlands and a UK-listed PLC, will remain unchanged.

The move comes after significant pressure to abandon the plans from UK shareholders. Several big institutions including Legal & General, Lindsell Train, Columbia Threadneedle and M&G Investments had all gone public with their opposition to the plans. Those four all feature in the top 12 shareholders.

The shares were little moved on the news.

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Our View

Unilever highlighted several benefits to its Dutch move, not least the potential for easier dealmaking. But there was no getting away from the fact that if the changes went ahead it was due to leave the FTSE 100.

That meant fund managers tasked with picking UK shares may well have had to sell out for no reason other than where the group's headquarters were. Asking them to elect to become forced sellers was like asking turkeys to vote for Christmas.

The shareholder backlash means Unilever has been forced to chuck its plans into reverse, which will have generated some pretty unpleasant internal mangling at what has historically been a finely tuned machine.

This embarrassing U-turn could lead to some awkward questions for senior management, but in the long-term it should just be a bump in the road. 2.5bn customers use a Unilever product every day, and with margins ticking up as costs come down, the potential for profit growth is clear.

One of Unilever's strengths is its emerging markets exposure. Weak sales growth on the back of economic strife in South America is a reminder that these markets can be volatile. But Unilever's wide range of markets means it can weather difficult conditions in a handful of geographies, and growing and increasingly wealthy populations in EM nations should be a long term tailwind.

The potential of earnings growth, plus the fact the dividend is comfortably covered by earnings and cash flows, mean we believe Unilever can increase shareholder returns in the future, but of course there are no guarantees. The prospective yield is currently 3.6%.

The shares are trading at 19.1 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 the EUR6bn proceeds from the spreads business as a share buyback rather than a special dividend seem sensible to us.

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First Half trading details (19 July 2018)

Unilever's first half turnover of EUR26.4bn is 5% lower than the previous year. However, after stripping out the impact of adverse currency movements, underlying sales are 2.5% ahead, or 2.7% if the recently-disposed-of spreads business is also excluded.

Second quarter growth was lower than that reported in the first quarter, with a truckers' strike in Brazil is a major factor behind the slowing momentum. With North American sales also falling, the strike saw underlying sales in The Americas fall 3.8%, compared to a 2.5% rise in Q1. Unilever expects this headwind to partially ease over the reminder of the year.

Elsewhere, The European and Rest of World divisions both saw the rate of underlying sales growth tick up 0.2 percentage points from Q1 to Q2, to 0.4% and 6.3% respectively.

Among Unilever's brands, skin care products like Vaseline performed well, as did Knorr within the Foods division, and Home Care brand Comfort.

The sale of the spreads business completed on 2 July. Unilever intends to use the proceeds to fund a EUR6bn share buyback programme. EUR3bn of shares have already been repurchased.

Paul Polman, Unilever's CEO said "our expectation for the full year is unchanged. We expect underlying sales growth in the 3% - 5% range, an improvement in underlying operating margin and strong cash flow. We remain on track for our 2020 goals."

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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 disclosure for more information.