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Unilever - medium-term on track, mixed Q1 performance

Sophie Lund-Yates, Equity Analyst | 29 April 2021 | A A A
Unilever - medium-term on track, mixed Q1 performance

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Unilever plc Ordinary 3.11p

Sell: 3,932.00 | Buy: 3,933.00 | Change 0.00 (0.00%)
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Unilever recorded underlying sales growth of 5.7% in the first quarter, with turnover of €12.3bn. This was driven mostly by volumes, which rose 4.7%, while prices were up 1.0%. There's a mixed trading picture across regions because of Covid. The group said conditions on China are normalising.

CEO, Alan Jope, said Unilever expects to "deliver underlying sales growth in 2021 within our multi-year framework of 3-5%, with the first half around the top of this range".

A quarterly dividend of €0.4268 per share was announced, and the group will start a €3.0bn share buyback programme in May.

The shares rose 2.4% 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. Plus, restaurants - especially in Europe - aren't exactly full at the moment. That holds Unilever's potential back for as long as current conditions last. We're also concerned about what the very challenging conditions in India will mean as we head to the half year.

Even though 2.5bn people use 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. 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 its enormous size and importance to the global consumer network are great assets and should hold it in good stead.

We're also encouraged by the €3.0bn buyback programme. Some have accused Unilever of under-prioritising shareholder returns, so this is a welcome surprise.

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: 18.8
  • 10 year average Price/Earnings ratio: 18.9
  • Prospective dividend yield (next 12 months): 3.6%

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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First quarter trading details (all sales quoted on an underlying basis)

Emerging markets saw underlying sales (USG) rise 9.4%, reflecting a strong recovery in China and India after last year's strict lockdowns. Latin America grew by high-single digits, but South East Asia declined. Developed markets were more disappointing, growing just 0.8%, with a modest North American performance offset by Europe.

Online sales grew 66% and now account for 11% of turnover.

Beauty & Personal Care (41% of turnover) saw USG up 2.3%, with turnover of €5.0bn, this was driven more by volumes than price, but the split was less pronounced than other divisions. Skin cleansing did well in the first half of the quarter, but declined in March as the group lapped very strong demand from last year.

Foods & Refreshment (38% of turnover) out-of-home ice cream returned to growth, driven by emerging markets, as new lockdowns in Europe have dented summer stock demand. In-home ice cream however grew strongly, and the division is still seeing high demand for its other at-home food products. Overall volumes rose 7.3%, with tea-led price increases of 2.3% resulting in USG growth of 9.8% and turnover of €4.7bn.

Home Care (21% of turnover) delivered turnover of €2.6bn, with USG of 5.9%. This was entirely volume-led as prices fell, because of pricing pressure in Europe. Fabric cleaning and fabric enhancing grew mid-single digit, led by recovery in India, as offices and schools reopened. Unilever expanded its Domestos range in the quarter.

The demerger of the Tea business is on track and expected to complete later this year. The group is considering options including an IPO of the de-merged business, a joint venture or disposal.

Underlying operating margins are expected to increase slightly at the full year. The pandemic is still causing higher supply chain costs and commodity and freight costs have increased.

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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.


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