Unilever Plc: Sustainable business growth rate and robust balance sheet

Unilever Plc (LON: ULVR) is a FTSE 100 listed Company, which is engaged in fast-moving consumer goods business.

On 29 April 2021, the Company will release its Q1 FY21 trading statement.

Rationale for Valuation – Buy at GBX 3,832.69

• ULVR has a strong cash and liquidity position.
• The Company began the year in good shape and maintained its dividend, with an increase of 4% in Q4 dividend per share, 1.9% in underlying sales and €1.5 billion in free cash flow.
• The volume-led growth underpins business resilience and its ability to respond to the changing market dynamics.
• In terms of debt ratings, Moody has assigned a stable outlook with long-term credit ratings of A1.
• The Company has decent fundamental metrics as it has maintained a ROE above 10% in the last three years.
• From the technical standpoint, 14-day RSI stood at around 21.21 (oversold zone), which is supporting the upside movement.

Key Risks

• The Covid-19 outbreak can cause massive supply chain disruption and increased operating costs.
• Moreover, extreme weather and water shortages can also impact the business.
• Lack of product regulations and product safety can lead to safety risks.

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 4 February 2021)

(Source: Company Website)

• The turnover was down by 2.4% YoY, due to the negative impact of currency-related items.
• However, the Company delivered a 1.9% YoY growth in underlying sales. Despite the strict lock-downs in H1 FY20, the emerging markets saw a growth of 1.2% YoYas China and India returned to growth, while Developed markets increased by 2.9% YoY.
• The Company has maintained its dividend in 2020 and increased by 4% in Q4 FY20.
• The Company also generated an underlying operating profit of €9.4 billion (down 5.8% YoY but surged by 0.7% at CER (constant exchange rates)) and a free cash flow of €7.7 billion (up €1.5 billion YoY).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company started the year 2021 in good shape and is delivering superior long-term financial performance through the sustainable business model. In 2020, the Company gave a resilient performance, with a strong set of results under unprecedented circumstances. ULVR is winning market share in the last quarter of 2020 while generating a decent underlying operating profit and an increase in free cash flow. Meanwhile, in FY20, the Company continued to achieve volume-led competitive growth to deliver profitability for maximizing shareholder value. Therefore, the business is delivering superior long-term financial performance through the strong balance sheet and liquidity position. The stock made a 52-week low and high of GBX 3,583.50 and GBX 4,944.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Unilever at the current market price of GBX 3,832.69 (as on 22 February 2021, before the market close at 9:36 AM GMT), with lower double-digit upside potential based on 17.81x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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