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Activist billionaire Nelson Peltz’s presence is another reason to buy the mega cap Marmite maker
Thursday 04 Aug 2022 Author: James Crux

Shares believes a rally off of March’s five-year lows at fast-moving consumer goods goliath Unilever (ULVR) has further to run.

Inflationary pressures may be starting to ease and this improvement in the macro backdrop looks set to be accompanied by self-help measures to support a more meaningful recovery in Unilever’s share price.

The Marmite-to-Magnum maker should also be able to flex its pricing power muscles and demonstrate its huge potential in emerging markets, where the company generates just under 60% of sales.

We concede the backdrop for Unilever remains tough given high input cost inflation, slower global growth and an unprecedented squeeze on household budgets. If it persists, elevated input cost inflation will require the £102 billion cap to keep pushing up prices and that risks a hit to volumes.

Yet these risks appear more than priced-in with Unilever trading on 17.9 times estimated earnings for 2023, a significant discount to the 27.5 price-to-earnings ratio high reached in 2018, and offering an attractive dividend yield of 3.7% based on next year’s estimates.

Generating copious amounts of free cash, robustly financed Unilever has started a share buyback of up to €3 billion. As if all that weren’t enough, the presence of hard-nosed activist Nelson Peltz on the shareholder register and board provides ‘potential strategic upside risk’, to quote analysts at Berenberg.

UNDER PRESSURE

The FTSE 100’s fourth biggest company by market cap, Unilever is the packaged consumer goods powerhouse behind an enviable collection of household, food and beauty brands ranging from Dove soap and Domestos bleach to Comfort fabric conditioner, Cornetto ice creams, Hellmann’s mayonnaise, skin care brand Pond’s and hair growth supplement Nutrafol to name but a few.

Deep entrenchment in the supply chains of its retailers is the source of Unilever’s wide economic moat and the company has reasonably predictable earnings.



Despite these advantages, CEO Alan Jope has come under fire from shareholders, among them pugnacious fund manager Terry Smith, for presiding over subdued growth, focusing too much on ‘woke’ issues and an abortive £50 billion bid for GSK’s (GSK) consumer healthcare unit.

Subsequently spun-out and listed as Haleon (HLN), the business has been ascribed a market value of £27 billion at the time of writing, far below the price Unilever had been prepared to pay for the asset.

The good news is Unilever’s chastened management is now listening to shareholders, having ruled out transformational acquisitions and centred the group’s financial communication on financial strategy rather than sustainability and ‘purpose’.

A well-received first half trading update (26 July) demonstrated why Unilever retains a big fan club among fund managers. The company reported underlying sales growth well ahead of analysts’ forecasts and despite the challenges of inflation and an uncertain economic outlook, raised its full year underlying sales growth forecast to above the top of its previous range of between 4.5% and 6.5%, ‘driven by price with some further pressure on volume’.



PRICING POWER

Unilever has exposure to categories at risk from consumers trading down to cheaper alternatives including skin cleansing, surface cleaners, cooking ingredients, laundry detergent and ice cream, notes Berenberg.

Yet after much debate about the company’s ability to pass on price increases to its customers without damaging sales, Unilever successfully hiked selling prices by 9.8% in the six months to June to mitigate input cost inflation. And while that led to a 1.6% fall in volumes, it still left underlying sales up 8.1% against an average forecast for an increase of around 7%.

CEO Jope was particularly pleased with the progress of Unilever’s ‘billion+ Euro brands’ (a collection of brands which have annual sales of a billion euros or more) which posted underlying sales growth of 9.4% in the first half and represent more than 50% of revenues.

In the first half, Unilever was able to increase prices by 12.1% in emerging markets, where sales grew 10% despite a headwind from China’s Covid lockdowns and Unilever’s brands are genuinely valued and regarded as ‘safe’ by consumers.

Jope also flagged the new category-focused organisational structure which came into effect on 1 July as ‘an important further step that will underpin the delivery of consistent growth, which remains our first priority’, and one set to generate around €600 million of cost savings over two years, with the majority in 2023.

In the face of a challenging market backdrop, Unilever insisted it continues to expect to improve margin in 2023 and 2024, through pricing, sales mix and savings. That will have pleased billionaire activist Peltz, recently appointed as a non-executive director after his investment firm Trian took a stake in the business.

UK investors may recall Peltz’s presence on Cadbury’s share register led to a break-up and eventual sale of that company.

Breaking up Unilever, whose sprawling range spans everything from plant-based meats, mayonnaise and ice creams to deodorants, washing and bathing products and bleach, could offer a longer-term catalyst for the share price.



 

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