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Unilever - sales growth rebound, but markets still mixed

Sophie Lund Yates (Equity Analyst) | 22 July 2021 | A A A
Unilever - sales growth rebound, but markets still mixed

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Unilever plc Ordinary 3.11p

Sell: 4,140.00 | Buy: 4,140.50 | Change -10.50 (-0.25%)
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There was underlying sales growth of 5.4% in the first half, with the majority of that coming from the second quarter. Each business segment grew, with the best performance coming from Beauty & Personal Care. Geographically, there have been improvements across Unilever's markets, but things remain volatile.

Underlying operating profit fell 4.7% to €4.8bn as high cost inflation and increased marketing spending dented margins.

A quarterly dividend of €0.4268 per share was announced.

The shares were down 3.8% following the announcement.

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Our View

The Domestos maker is turning a corner. As restrictions start to lift, customers are eating out and getting ready for events again - acting as a boon to Unilever's substantial food and beauty portfolios.

We've been particularly impressed by the group's new volume-led approach. This is much more attractive than relying on price increases, and we hope it's something Unilever can continue. A certain level of revenue stream is pretty much guaranteed when it comes to Unilever. 2.5bn people use one of its products every day, whether it be Ben & Jerry's or Dove toiletries . That's a very attractive accolade. That huge scale and revenue visibility is what underpins the group's ability to pay a dividend. The 12 month prospective yield is 3.5%, which looks sustainable to us. Remember no dividend is ever guaranteed.

While Unilever is likely to be seen as somewhat of a steady ship, that doesn't mean the coast is clear.

Sales were sluggish before Covid. Preparing a springboard for more exciting levels of 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. It's already separating the tea business from its core operations.

The move is Unilever's way of making sure it's in the best possible shape to start the difficult process of sparking stronger long-term sales growth. 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.

We wonder how much of the pressure is coming from the deluge of smaller brands and cheaper own-brand options.

A surge in digital marketing undercuts the potency of Unilever's traditional multi-million pound advertising campaigns. Brand power and loyalty generally 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.

Margins of close to 19% mean it has room to cushion the effect of disruption. But we're in for a run of margin stagnation thanks to higher marketing spending and unhelpful cost inflation, which could keep a lid on profits.

Unilever is an integral part of the global consumer supply chain. That means there are long-term attractions in our view. Any growth is likely to be steady rather than spectacular. And there are likely to be ups and downs along the way as the group grapples with its gargantuan turnaround plans.

Unilever key facts

  • Price/earnings ratio: 19.4
  • Ten year average Price/earnings ratio: 19.0
  • 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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Half year results

Growth was largely driven by volumes, which increased 4.0%, while prices rose 1.3%. Asia saw the strongest underlying sales growth (USG), up 7.7%, then The Americas which improved 5.1%, unusually driven by prices, and Europe rose just 1.1% overall. Growth has slowed in Europe and The Americas as the group laps the exceptional demand for hygiene and food products at the start of the pandemic.

Online sales rose 50% and these now account for 11% of sales.

There was 3.3% USG growth in Beauty & Personal Care, with a fairly equal split between volumes and prices. Skin care grew double digits, while deodorants returned to growth. Growth accelerated in the second quarter as living restrictions lifted in some markets. Underlying operating margins fell 2.2% as Unilever increased marketing spending, and there was "high" cost inflation.

Home Care recorded USG of 4.5%, which was entirely driven by volume as prices dipped 0.3%. Fabric cleaning and Fabric enhancers did well in the half. Home & hygiene sales declined mid-single digits. Underlying operating margins fell 1.3%, also because of increased marketing and cost inflation.

Improved ice cream sales - both in and out of home - helped Foods & Refreshment USG rise 8.1%. 5.8% came from volumes, and the rest from higher prices. Out of home ice cream in Europe saw double digit growth, as living restrictions began to ease, but sales haven't returned to pre-Covid levels. Magnum and Ben and Jerry's recorded strong growth. Food solutions also grew in the double digits, but in most markets ''turnover has not yet recovered to 2019 levels''.

Group underlying operating margins fell from 19.8% to 18.8%, as Unilever stepped up marketing spend after cutting back during earlier lockdowns, and higher commodity costs.

The separation of the tea business is due to complete in October 2021, and the group is considering an IPO, sale or partnership for these assets. Unilever is also considering ''options'' for its Elida Beauty portfolio, which includes brands: Q-Tips, Caress, Tigi, Timotei, Impulse and Monsavon.

The lower operating profit meant free cash flow fell from €2.9bn to €2.4bn. Net debt was €22.4bn at the end of June, compared to €20.9bn at the start of the year.

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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.