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Unilever - sales up but operating profit misses consensus

Sophie Lund-Yates, Equity Analyst | 4 February 2021 | A A A
Unilever - sales up but operating profit misses consensus

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Unilever plc Ordinary 3.11p

Sell: 3,875.50 | Buy: 3,876.50 | Change -62.00 (-1.58%)
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Full year underlying sales rose 1.9%, reflecting a 1.6% increase in volumes and a 0.3% rise in price. Underlying operating profit rose 0.7%, ignoring the impact of exchange rates, to €9.4bn. This was a little behind what analysts expected.

Sales growth was driven by hygiene, laundry and in-home food products. Food solutions, out-of-home ice cream and beauty and personal care products struggled because of lockdowns.

Unilever announced a quarterly dividend of €0.4268 per share.

The shares fell 4.1% following the announcement.

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Our View

Unilever's stable of brands, including Domestos and Ben & Jerry's has helped it stay upright in the pandemic storm.

But while more of us are busier with disinfectant, and eating at home more, we aren't buying much makeup, and we certainly aren't eating out. That holds Unilever's potential back for as long as current conditions last.

This is frustrating - even though 2.5bn people uses one of its products every day, sales were already sluggish before Covid. Preparing a springboard for future growth is the logic behind Unilever's decision to become single-listed on the London stock exchange. A simplified legal structure makes things like disposals and acquisitions easier and will help the group streamline its operations. First up will be the sale of the tea business in developed markets - household names like PG Tips are among those being cast out.

The move is Unilever's way of making sure it's in the best possible shape to start the difficult process of rejuvenation. This will see high levels of restructuring costs - equivalent to about 2% of sales - for the next two years. Stoking the engine of a tanker as big and complex as Unilever requires huge resources, and takes time. This leads us to our biggest grievance where Unilever is concerned - this turnaround feels like it was slow off the mark, and is unlikely to yield huge results for some time.

We wonder how much of the pressure is coming from the deluge of smaller brands and cheaper own-brand options, which have sprung up in recent years. A surge in their digital marketing undercuts the potency of Unilever's traditional multi-million pound advertising campaigns. Brand power and loyalty supports increased prices and helps boost margins. Some of the extra profit is then reinvested in next year's marketing budget, keeping the virtuous circle spinning. If a consumer base becomes less loyal it throws that circle through a loop.

We should add it's not that Unilever has lost the war, and margins of over 18% mean it has room to help cushion the effect of disruption. We can't stress enough that it's enormous size and importance to the global consumer network are great assets and should hold it in good stead.

A certain level of growth is likely to be expected for this beast - although remember nothing's guaranteed. The question from here is how successful Unilever will be at squeezing out perhaps more exciting levels of growth over the long-term.

Unilever key facts

  • Price/Earnings Ratio: 19.2
  • 10 year average Price/Earnings ratio: 18.8
  • Prospective dividend yield (next 12 months): 3.5%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year trading details

Turnover fell 2.4% to €50.7m, driven by adverse currency movements, which offset positive contributions from acquisitions. Underlying operating margins fell to 18.5%, from 19.1% last year.

Beauty & Personal Care (41.6% of turnover) saw underlying sales growth (USG) of 1.2%, which was entirely driven by volume growth as prices were flat. Growth was held back by lower demand for skin care, deodorants and hair care. Underlying operating margins fell 1 percentage point to 21.7%, reflecting a less lucrative mix of products sold and higher Covid-19 costs. Underlying operating profit fell 7.4% to €4.6bn.

Foods & Refreshment (37.7% of turnover) saw USG rise 1.3%, with the majority of this coming from price increases. Retail food business did well, but the closure of restaurants hurt Food Solutions. The Hellmann's and Ben & Jerry brands performed well. Underlying operating margins declined slightly, which fed into a 3.7% fall in underlying operating profit to €3.3bn. This reflected less lucrative sales (retail sales are lower margin than food solutions), and higher Covid-19 and commodity costs.

Homecare (20.6%) of turnover) was the best performer, with USG rising 4.5% - volume increases offset price declines. Underlying operating profit was €1.5bn compared to €1.6bn in 2019. Home and hygiene brands delivered strong growth, and Domestos did well, helped by being launched in China.

Unilever said online now accounts for 9% of business. It said part of the new strategy is to focus "particularly on e-commerce and digitising the distributed trade". The group also outlines it now expects restructuring costs of around €1bn for 2021 and 2022.

An improvement in receivables (the amount of money owed to Unilever) helped free cash flow rise to €7.7bn, from €6.1bn last year. This helped lower net debt to €20.9bn (€23.1bn in 2019). Net debt is now equivalent to 1.8 times cash profits, down from 1.9. This is expected to rise to 2x.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.