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Unilever - Tea business on the chopping block

Sophie Lund-Yates, Equity Analyst | 19 November 2021 | A A A
Unilever - Tea business on the chopping block

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Unilever plc Ordinary 3.11p

Sell: 3,910.50 | Buy: 3,912.50 | Change -27.50 (-0.70%)
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Unilever has announced plans to sell its global Tea business, which included the likes of Lipton and PG Tips, to CVC Capital Partners Fund VIII for €4.5bn. The deal's expected to complete in the second half of 2022, subject to approval.

Alan Jope, CEO of Unilever said "The evolution of our portfolio into higher growth spaces is an important part of our growth strategy for Unilever. Our decision to sell ekaterra demonstrates further progress in delivering against our plans".

The shares were broadly flat the morning after the announcement

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Our View

Easing lockdown restrictions has had a mixed effect on Unilever's portfolio. Lockdown-friendly items like home cleaning and in-home food are struggling to keep up with last year's unprecedented demand. But other categories, like OLLY vitamins and supplements and Prestige beauty, are benefitting.

The result was a volume decline across the board in the third quarter, which is far from ideal given the group's new volume-led strategy. But one quarter doesn't speak for the entire year's performance, and the group's been able to eek out volume growth across the year-to-date. The question is whether volumes can return to growth now consumers are facing higher prices to offset Unilever's rising input costs.

Stoking the engine of a tanker as big and complex as Unilever takes time and resource, though. High restructuring costs - equivalent to about 2% of sales - are expected over the next two years.

The long-awaited sale of Unilever's global Tea business is a step in the right direction. The business, which includes brands such as Lipton and PG Tips, equated to around £2bn in revenue a year but growth has been slow for some time. A €4.5bn price tag gives the group a war-chest for future acquisitions or to fund organic growth. And Unilever is keeping hold of regions, like India and Indonesia, where it's seeing rising tea consumption.

However, at a macro level we wonder how much of the current pressure is a result of competition from 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 the consumer base becomes less loyal it throws that circle out of whack.

Margins of close to 19% mean Unilever can weather some 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.

Despite its struggles with volumes, Unilever's still a reasonably defensive play. A certain level of revenue is pretty much guaranteed. 2.5bn people use one of its products every day, whether it be a tub of Ben & Jerry's or Dove toiletries. The huge scale and revenue visibility underpins the group's ability to pay a dividend, with a prospective dividend yield of 3.9%. Remember no dividend is ever guaranteed.

Unilever is an integral part of the global consumer supply chain and has long-term attractions in our view. Any growth is likely to be steady rather than spectacular, but there will be bumps along the way as the group grapples with its turnaround plans in an increasingly challenging environment.

Unilever key facts

  • Price/Earnings ratio (next 12 months): 17.6
  • 10-Year Average Price/Earnings ratio: 19.1
  • Prospective dividend yield (next 12 months): 3.9%

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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Third Quarter Results (underlying) 21 October 2021

Revenue in the third quarter was €13.5bn, reflecting underlying sales growth (USG) of 2.5%. That was driven by price increases, as volumes fell across all categories. Full year sales growth is expected to be well within management's 3-5% target range and currently stands at 4.4% for the first nine months.

The board declared a quarterly interim dividend of 35.98p per share, with the ongoing share buyback programme to be completed by year end.

Revenue in Beauty & Personal care was up 2.6% to €5.7bn. Overall volumes declined 1.3% as an uptick in demand for Vaseline and Prestige Beauty brands, was offset by lower demand in skin cleansing and oral care. Prices rose 3.9% in response to rising commodity prices.

Home Care sales rose 1.4% to €2.7bn. This reflected a 4.8% price increase and a 3.2% volume decline as the group lapped last year's strong demand for household cleaning products. Cost inflation meant the group raised prices, particularly in Latin America, South Asia and Turkey.

Foods & Refreshment saw USG of 3.0% to €5.1bn. Volumes declined 0.8% as in-home ice cream demand was lower compared to last year and poor weather and travel restrictions in Europe weighed on out-of-home ice cream sales. Prices in the division rose 3.8%, the result of higher input costs.

Prices increased and volumes declined across all geographies. The Americas was the best performing region with USG of 4.4%. Asia, the Middle East and Eastern Europe saw sales rise 2.3% and turnover in Europe was broadly flat.

E-commerce grew 38% and now makes up 12% of total sales.

The group completed the separation of its tea business on 1 October and saw a net positive impact of 1.6% on sales from acquisitions and disposals.

Find out more about Unilever shares including how to invest

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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