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Unilever - warns on slower sales

Sophie Lund-Yates | 17 December 2019 | A A A
Unilever - warns on slower sales

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Unilever plc Ordinary 3.11p

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Unilever expects underlying sales growth for the full year, and the first half of 2020, to fall below previous guidance of growth in the lower half of the 3-5% multi-year range. The slowdown reflects tough conditions in South Asia and West Africa, and the trading environment in developed markets also remains challenging.

Profits, margin and cash are not expected to be impacted.

The shares fell 4.2% following the announcement.

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Our View

Unilever is the home of many household staples, and sales of things like Dove soap or Magnum ice creams tend to tick over regardless of the economic climate. That meant news of sluggish growth came as a bit of a surprise.

But we think Unilever's longer-term positives remain in play.

On a typical day, a third of the world's population will use a Unilever product. An effective marketing division means Unilever will hope to grow market share over time, while strengthening brands helps it increase prices and boost margins. Some of the extra profit is reinvested in next year's marketing budget, keeping the virtuous circle spinning, and historically there's been enough to increase the dividend too.

This rinse and repeat approach has led to impressive shareholder returns, and Unilever plans to boost profitability further with cost-savings. The dividend is comfortably covered by earnings and cash flows, and we think there's clear potential for the payout to keep increasing, although as always there are no guarantees. At the time of writing, the prospective yield is 3.4%.

While other consumer goods groups share these characteristics, Unilever's emerging markets (EM) exposure separates it from rivals. A 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 group promised to deliver margins of 20% by 2020, and that finish line is now very much in view. Full year margins are due to reach just over 19%, so things are moving in the right direction - but that does leave you wondering where profit growth is going to come from in future.

That leads us nicely into the risk of a de-rating. Before the latest trading update, the shares traded on 19.6 times expected earnings, some way above the ten year average. If profit growth were to slow investors would struggle to justify that rating, leading to a painful fall in the share price. Still, for those prepared to take the long view, we think Unilever has the potential to be rewarding, although there are no guarantees.

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Third quarter trading details (17 October 2019)

Underlying sales rose 2.9%, broadly in line with expectations. That reflects another quarter of strong growth in emerging markets.

Underlying sales growth (USG) came from almost identical increases in volume and price, rising 1.4% and 1.5% respectively. Combined with favourable currency movements that drive headline revenue up 5.8% to EUR13.3bn.

A quarterly interim dividend of EUR0.4104 per share has been announced, 6% ahead of last year.

Emerging markets underlying sales grew 5.1% driven by a strong performance in South East Asia, Turkey and the Middle East, while uncertain economic conditions meant Africa had a difficult quarter. The rise in sales came from an improvement in both volume and price.

Within Developed Markets, USG declined 0.1%, as price declines - particularly in Europe - outweighed a slight increase in volumes. That reflects a European market that "remains difficult", although declines in Germany slowed. North America had positive USG, as prices improved slightly.

Beauty & Personal Care delivered a 2.8% rise in sales, reflecting strong volume growth. Deodorants performed particularly well, and skin cleansing saw modest growth. Home Care saw even stronger sales growth, up 5.4%. Brands including Sunlight dishwasher and Cif did very well. Foods & Refreshment sales grew 1.7%, as improved pricing offset a slight volume decline.

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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.

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