Key Investment Highlights
 

1. Unilever Plc (LON: ULVR) is a consumer goods seller company, operating globally for more than 120 years as future-makers, innovators, and pioneers.

2. The company sells its products to over 2.5 billion people and has an employee base of around 155,000 professionals.

3. ULVR has a strong global presence and serving customers from over 190 countries worldwide and has over 400 brands under its portfolio.

4. From the past 38 years, Unilever is consistent towards its dividend payments, with an average growth of 8 per cent per year without any reductions.

5. Completion of GlaxoSmithKline Consumer Healthcare Limited merger shall bolster the Foods & Refreshment portfolio and generate lucrative synergy in future.

6. Extensive portfolio of brands and scale of operations shall assist the Group to tackle short term uncertainties presented by the Covid-19 pandemic.

7. The group continues to make an investment in its brands, supply chain systems, marketing, people, and IT capabilities to deliver consistency in free cash flows, core operating margin and underlying sales growth.  

8. Unilever has generated strong revenue growth with a decent operational performance for the current period.

9. The company seeks to enter new segments and tap new markets through investing in innovation capabilities.

10.The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.

 

Unilever PLC (LON: ULVR) - Adopted Immediate Measures to Contain COVID-19 disruption; Witnessing a Change in Consumer Behaviour and Upholding a Strong Liquidity and Financial Position.

Unilever PLC is a FTSE 100 listed FMCG (fast-moving consumer goods) Company. The Company markets and produces a broad portfolio of products such as home care, food, beverages, health, and wellbeing products. The Company was officially established in the year 1930, and currently, it serves with more than 400 brands in around 190 countries with nearly 155,000 employees.The Company operates through three operating segments: Beauty & Personal Care, Home Care and, Foods & Refreshment. Unilever has several brands, with an annual turnover of over EUR 1 billion such as Knorr, Lipton, Rexona, Omo and Hellmann’s. From 2014 to 2019, the Group delivered an average sales growth of 3.3 per cent annually.

 

(Source: Annual Report, Company Website)

Potential of Business Segments
 

Beauty & Personal Care

1. Key Financials in 2019: Contributed around 42 per cent of Group turnover and 52 per cent of Group operating profit.

2. Major Categories of Products: Deodorants, Skin cleansing, Skincare, Oralcare and Haircare.
 

Foods & Refreshment

1. Key Financials in 2019: Represented 37 per cent of total turnover and 32 per cent of total operating profit.

2. Major Categories of Products: Dressings, Ice cream, Tea and Savoury.
 

Home Care

1. Key Financials in 2019: Contributed around 21 per cent of total turnover and 16 per cent of total operating profit.

2. Major Categories of Products: Fabric solutions, home and hygiene.
 

Key Statistics



A Glimpse of Global Operations

Geographically, the Group bifurcates its revenue into three regions – Asia/AMET/RUB, the Americas and Europe.

The scale of Global operations can be understood by the below statistics:
 

1. Contributed EUR 52 billion of turnover in FY2019.

2. Provides its 400 plus brands in 190 countries.

3. Serves 2.5 billion people every day.

4. Having 12 brands with a turnover of over EUR 1 billion in the year.

5. Caters through 25 million retail outlets in their distribution chain.

6. Offers 13 among the top 50 fast-moving consumer goods brands.

7. Serves through more than 150,000 employees worldwide.
 

(Source: Presentation, Company Website)

Progress of Key Performance Indicators in Non-Financial Aspect in 2019
 

1. Sustainable sourcing, measured by the percentage of tonnes purchased, stood at 62 per cent in 2019 as against 56 per cent in 2018.

2. In 2019, 56 per cent of their portfolio met the highest nutritional standards as against 48 per cent in 2018, while the target for 2020 is 60 per cent.

 

 
(Source: Annual Report, Company Website)

Significant Developments of 2020

1. 1^st April 2020: The Unilever Group announced the completion of the merger between Hindustan Unilever Limited (HUL) with GlaxoSmithKline Consumer Healthcare Ltd. Following the transaction, the Unilever’s holdings have been diluted from 67.2 per cent to 61.9 per cent in HUL.

2. 24^th March 2020:The Group had published the final terms regarding its €2,000,000,000 bonds issuance on the European markets.
 

Top Shareholders

 

Improving Momentum in Trading Update for the First Quarter of 2020


(Source: Trading Update, Company Website)
 

1. On 23^rd April 2020, Unilever released an update on the trading performance for the first quarter of the financial year 2020. Underlying sales were flat against 2019, with a growth of 0.2 per cent in volume and negative price of 0.2 per cent. In Q1 FY20, the group saw growth in Developed markets of 2.8 per cent, while emerging markets tumbled 1.8 per cent. 

2. Turnover for the first quarter of 2020 increased by 0.2 per cent. From a negative impact of 0.4 per cent from currency, the business showed a positive impact of 0.6 per cent, driven by acquisitions net of disposals.

3. In food service, the company has closed the food outlets in many markets, due to implementation of the lockdown. In China, there is a negative impact from late January. The growth in the Indian market was impacted by slow market performance and imposed lockdown.

4. In E-commerce, shoppers are moving to online channels from offline channels, reflecting an increase in this market segment.

5. From the perspective of the segment, the underlying sales from Beauty & Personal Care increased by 0.3 per cent, Home Care sales surged by 2.4 per cent, and Foods & Refreshment underlying sales dipped by 1.7 per cent. The quarterly dividend per share maintained at €0.4104.
 

Financial Highlights – Decent Underlying Performance in FY2019 (31^st December 2019)

 
(Source: Company Website)
 

1. For the financial year ending 31^st December 2019, driven by the favourable impact from currency, the group’s turnover surged by 2 per cent to EUR 52 billion versus FY2018 data.

2. The underlying sales showed a growth of 2.9 per cent with 1.6 per cent growth in price and 1.2 per cent volume growth. The operating margin on an underlying basis went up by 50 bps, and gross margin surged by 30 bps for the period.

3. Driven by increased underlying operating profit, the Free cash flow increased by EUR 0.7 billion to EUR 6.1 billion for the financial year 2019. The return on invested capital increased to 19.2 per cent in FY2019 from 18.1 per cent in FY2018.

4. The group’s underlying earnings per share surged by 8.1 per cent to EUR 2.55, reflecting the positive impact of currency by 2.3 per cent.
 

Financial Ratios – Strong Profitability Margins versus the Industry Median 
 
 

The reported EBITDA margin, Operating margin, Pretax margin and Net margin stood at 22.9 per cent, 16.8 per cent, 15.9 per cent and 11.6 per cent, respectively, for the financial year 2019 and were higher as compared to Industry Median. Return on equity for the financial year 2019 stood at 45.8 per cent, which was significantly higher than the Industry Median. On the liquidity front, Unilever Plc’s current ratio was lower than the industry median of 1.28x. On leverage front, the debt-equity ratio of the Unilever Plc’s was 2.11x, which was higher as compared to the industry median of 0.17x.

Share Price Performance


Daily Chart as on 11^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 11, 2020, at the time of writing (before the market close, at 8:45 AM GMT+1), Unilever Plc shares were trading at GBX 4,129.00, up by 1.13 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 5,333.00/GBX 3,583.50.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Unilever Plc with its peers, Price/Earnings multiple has been used. The peers are Science in Sport Plc (NTM Price/Earnings was 72.53), Tate & Lyle Plc (NTM Price/Earnings was 12.50), Glanbia Plc (NTM Price/Earnings was 11.28), Innovaderma Plc (NTM Price/Earnings was 6.83) and Warpaint London Plc (NTM Price/Earnings was 6.14). The Average of Price/Earnings (NTM) of the company’s peers was 21.86x (approx.).

Method 2: Price/Cash Flow Approach (NTM)



To compare Unilever Plc with its peers, Price/Cash Flow multiple has been used. The peers are Givaudan SA (NTM Price/Cash Flow was 26.83), Kerry Group Plc (NTM Price/Cash Flow was 19.20), Reckitt Benckiser Group Plc (NTM Price/Cash Flow was 17.64), Glanbia Plc (NTM Price/Cash Flow was 9.26) and Britvic Plc (NTM Price/Cash Flow was 9.21). The Average of Price/Cash Flow (NTM) of the company’s peers was 16.40x (approx.).

Valuation Metrics


(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

Unilever Plc has a dividend yield of 3.50 per cent, which was higher than the industry dividend yield of 2.87 per cent and slightly lower than the sector dividend yield of 3.52 per cent. This needs to be considered in view of the recent correction in the stock price.

Unilever Plc Vs FTSE-100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Unilever Plc share price has delivered 44.66 per cent returns as compared to negative 14.74 per cent returns of FTSE-100 index, which shows that the stock has outperformed the index during the last five years.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

Unilever Plc has generated a total return of 63.67 per cent in the last five years versus the total return of FTSE All share of 3.55 per cent for five years period.

Industry Outlook

The Global consumer goods industry currently is passing through a rough phase amid covid-19 pandemic chaos. According to the World Bank, the global growth witnessed a significant slowdown in 2019, due to weak global trade and investments amid the geopolitical tensions and climate concerns affected developed, developing, and emerging economies. The recent contagion of COVID-19 and its impact is certainly concerning and substantially affecting the supply of goods. As per the report from Allied Market Research, the market size of Global FMCG industry is projected to reach USD 15,361.8 billion by 2025 from USD 10,020.0 billion in 2017, representing a CAGR of 5.4 per cent from 2018 to 2025.

Growth Prospects and Risk Assessment

The company has been focussed on creating high-quality products and services, which had resulted in a higher level of customer satisfaction. The company, through its dedicated research and development team of 6,000 professionals, is providing superior quality products and also bringing new products and technologies, which is helping them to expand into new industries. The company using its cost synergies had optimised its operational structure to achieve sustainable growth in the future. The company has limited suppliers from where it sources its strategic raw materials and any breakdown in the supply, especially considering the risk from Brexit, would result in the company's inability to manufacture and satisfy customer demand. Any change in regulations and government policies could affect the overall business of the company.

Business Outlook Scenario

The company, through itssustainable business model, is delivering robust long-term financial performance with a decent liquidity position and strong cash flow generation capabilities. The group is keeping the factories running through the several unprecedented challenges in local operating environments across the value chain, while it is also opening new capacity for hand hygiene & food and maintained product supply.ULVR witnessed an improvement in in-home food and hygiene products sales despite the changing patterns in demand. The group also provide hygiene education programmes through its brands such as Lifebuoy and Domestos.

Through donations and partnerships, it is supporting communities. The company is contributing EUR 100 million to assist global and national efforts to tackle the Covid-19 pandemic via donations of sanitiser, food, soap, and bleach as well as leveraging the procurement network. For the small-scale retail customers, most vulnerable small and medium-sized suppliers, it is also giving a EUR 500 million of cash flow relief. Led by the unprecedented crisis created by COVID-19 pandemic, the company is withdrawing the prior growth and margin outlook for 2020. There may be a short-term impact on consumption habits. The Unilever Group has been into business for more than 90 years and relatively accustomed to downturns and uncertainties. Moreover, the Group has taken several initiatives to cater demand, protecting supply and maintaining the financial strength during the unprecedented uncertainties of COVID-19 outbreak. The Company is also addressing the social and environmental changes through its brands by reducing greenhouse emission, increasing nutritional value and preserving natural resources.

Over the course of 3 years (FY16 - FY19), the company’s Net Income surged from EUR 5,184 million in FY16 to EUR 5,625 million in FY19. Compounded annual growth rate (CAGR) stood at 2.76 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 4,083.00 (as on 7^th May 2020), with lower double-digit upside potential based on 21.86x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 16.40x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 11^th May 2020).

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