Unilever plc (ULVR) Ord 3.11p
HL comment (22 October 2020)
Underlying sales grew 4.4% in the third quarter, reflecting a 3.9% increase in volumes and 0.5% rise in prices. Turnover reached €12.9bn. Both emerging and developed markets reported mid-single digit increases.
The group said "Covid-19 continues to influence consumer behaviours and channel dynamics in our markets", with demand for out-of-home vs at-home dining shifting depending on the region.
A quarterly dividend of €0.4104 per share was announced.
The shares were unmoved following the announcement.
Unilever has remained a steady ship in a storm.
Sales growth of 4.4% in the current environment is not to be sniffed at. It's testament to Unilever's stable of brands, including Domestos, Dove and Ben & Jerry's - and the fact it's been able to pivot quickly to meet changing demand brought on by the pandemic.
The positive news comes at a time when Unilever is looking for ways to secure long-term growth. Prior to the pandemic sales were sluggish, particularly in developed markets.
And while we can't knock progress, the group needs to prepare for a potential unwinding of coronavirus tailwinds, (sales of home hygiene products have gone through the roof, and should temper in time). Margin boosts from lower marketing spending won't last forever either.
Preparing a springboard for future growth is the logic behind Unilever's plans to pursue a single listing 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. Even though a third of the world's population uses one of its products every day, Unilever has struggled to grow sales in recent times.
We wonder how much of the pressure is coming from a weakening of brand power. Smaller brands and cheaper own-brand options have sprung up in recent years, helped by a surge in digital marketing. This can undercut the potency of Unilever's traditional multi-million pound advertising campaigns.
This is a particular bugbear for the consumer giants because 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 almost 20% mean Unilever has room to help cushion the effect of disruption.
It's incredible size and current brand potency means 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: 20.7
- 10 year average Price/Earnings ratio: 18.6
- Prospective dividend yield (next 12 months): 3.2%
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.
Third quarter trading details (all sales quoted on an underlying basis)
Sales were boosted by continued high demand for hand and home hygiene products, and at-home food items. The latter is particularly true in North America where overall growth was the strongest. €ope was more mixed and pricing was more challenging, depressing sales growth. Growth improved in China, and Indian economic activity has picked up. Indonesian and Latin American markets contracted in the quarter.
The online business grew very strongly, and rising 76%.
Beauty & Personal Care (41.4% of turnover) saw sales growth of 3.8%, comprising a 3.5% increase in volumes and 0.4% for pricing. Skin cleansing products were a stand out performer, reflecting the launch of new antibacterial products from Dove. Skin care and deodorants declined as more people stay at home.
Foods & Refreshment (38.6% of turnover) saw the retail business grow by double digit percentages, and tea also had good growth. Declines in out-of-home ice cream sales were more than offset by in home ice cream, led by brands including Ben & Jerry's and Magnum. The food service channel remained fully or partially closed in many markets and food service sales declined by over 20%. Trends in China are improving.
Unilever said it's pressing on with plans to separate the tea business.
Home Care (20.0% of turnover) was boosted by increased demand for cleaning products, with a very high demand for antibacterial products. Domestos was launched in China during the quarter. Growth was entirely driven by a 6.7% volume increase, while pricing fell 1.6%.
The group's in discussions regarding a new proposed Dutch tax bill, which would have financial implications for Unilever's unification plans. It's unclear when or if this bill will be enforced, and Unilever is continuing with its original plans.
The court hearing to approve the cross-border merger is scheduled to take place on 2 November 2020.
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.
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