Company Overview: Unilever PLC (NYSE: UL) manufactures fast-moving consumer goods (FMCG), focusing on Beauty & Personal Care, Home Care, and Foods & Refreshment segments. Under the Axe, Clear, Dove, Lifebuoy, Lux, Pond's, Rexona, Signal, Suave, Sunsilk, TRESemmé, and Vaseline brands, the Beauty & Personal Care section offers skincare and hair care products, deodorants, and skin cleaning products. The Foods & Refreshment category includes ice cream, soups, bouillons, spices, mayonnaise, and ketchup, whereas the fabric solutions and home care and hygiene items are available in the Home Care area. UL markets its products in more than 190 countries.

UL Details  

Key Takeaways from H1FY21 (ended June 30, 2021)

• Slight improvement in Topline: Turnover increased slightly by 0.30% to EUR 25.79 billion during H1FY21 from EUR 25.71 billion during H1FY20.
• Decline in Bottomline: The net profit during H1FY21 was EUR 3.40 billion vs. EUR 3.54 billion reported in H1FY20, representing diluted earnings per share (EPS) of EUR 1.19.
• Underlying Growth Metrics: The firm reported YoY underlying sales growth (USG) of 5.4% in H1FY21, with volume growth (UVG) of 4.0% and pricing growth (UPG) of 1.3%.

Stable Topline & Bottomline Key Highlights; Analysis by Kalkine Group

Recent Developments

• On October 21, 2021, the company stated that it witnessed a USG of 2.5% in Q3FY21 with a 4.1% UPG and a 1.5% drop in volume. It also revealed that its Q3FY21 revenue climbed by 4.0%, with 1.6% coming from net acquisitions.
• UL announced the launch of the Positive Beauty Growth Platform on September 29, 2021, through which it intends to collaborate with entrepreneurs to foster innovation and brand growth.
• On September 27, 2021, the firm announced that its ice cream facility in TaiCang, China, has joined the Lighthouse Network, a network of manufacturing facilities run by the World Economic Forum.
• On September 07, 2021, UL announced the addition of 27 of its PETA-approved brands to a campaign, which would use its collective influence to urge customers to support the European Citizens' Initiative, promoting cruelty-free cosmetics in Europe.
• On August 02, 2021, it acquired Paula's Choice, a digital-led beauty care brand, for an undisclosed consideration.

Steady Dividends

On October 19, 2021, the company declared a Q3FY21 interim dividend of USD 0.4975 per ADS, which will be paid on December 01, 2021, to shareholders of record on November 05, 2021. Over the last five years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Consistent Dividends (Data Source: REFINITIV)

Balance Sheet & Liquidity Position

• Decline in Cash Balance: UL's cash balance at the end of H1FY21 was EUR 5.07 billion, down 20.28% from EUR 6.36 billion available at FY20 end.
• Cashflow from Operations: Operating cash inflow during H1FY21 was EUR 3.96 billion vs. EUR 4.43 billion during H1FY20.
• Stable Debt: Total debt was EUR 27.54 billion, almost at par with EUR 27.31 billion reported as of December 31, 2020.

Key Metrics: In H1FY21, UL's EBITDA and net margins were 22.1% and 13.2%, vs. the industry median of 17.1% and 9.3%, respectively. In addition, its Debt/Equity ratio as of H1FY21 end was 1.62x vs. 1.79x for H2FY20.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders (in terms of ownership of ordinary shares listed on the LSE) together form around 18.39% of the total shareholding, while the top 4 constitute the maximum holding. BlackRock Institutional Trust Co., N.A., and The Vanguard Group, Inc. hold the maximum stake in the company at 6.53% and 3.11%, respectively, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Consumer Behavior Risk: The firm relies on developing unique goods that fulfill the demands of its customers and bringing new items to market quickly. Its capacity to create and remain competitive is dependent on the value and relevance of its brands and goods to customers all over the world.
• Plastic Usage Risk: The company's items are packaged with a substantial amount of plastic. Its future performance depends on reducing the quantity of virgin plastic it uses, increasing the utilization of recycled plastic, and improving the recyclability of its packaging.
• Supply Chain Risk: Purchasing supplies and timely distribution of products to consumers are critical to the company's success. Physical interruptions, environmental and industrial mishaps, trade restrictions, or problems at a major supplier might all influence the company's capacity to deliver orders to its consumers through the supply chain network.
• Climate Risk: Increased frequency of extreme weather (storms and floods) might lead to more disruptions in the company's manufacturing and distribution networks. In addition, as a result of climate change, products may become expensive or scarce, leading to decreased growth and profitability.

Outlook

• Looking ahead, UL intends to make strategic decisions with a focus on operational excellence to achieve continued competitive growth. It stated that its year-to-date (9MFY21) USG rate is 4.4% and that its multiyear growth target is estimated to remain in the range of 3% – 5% in FY21.
• This estimate also accounts for the current industry-wide cost inflation, which is relatively high, and is expected to stay this way in the next year.
• To tackle inflation, UL plans to continue adjusting prices and employing various cost-cutting measures across all of its categories and markets. As a result, its FY21 margin estimates are expected to remain flat.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the past twelve months, UL corrected ~12.22%. The stock is currently trading below the mid-point of its 52-week range of USD 51.98 to USD 63.45. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a slight premium compared to its peer's average, considering its market dominance, strong profit margins, and international presence. We have taken peers like Proctor & Gamble Co. (NYSE: PG) and Colgate-Palmolive Company (NYSE: CL). Considering the stability in the top and bottom-line performances, strategic expansion plans, steady dividend yield, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 53.54, down ~0.85% as of October 27, 2021.

UL Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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