About the Company

Unilever is an Anglo-Dutch multinational consumer goods company co-headquartered in Rotterdam, Netherlands, and London, United Kingdom. Its products include food, beverages, cleaning agents and personal care products.

Unilever owns over 400 brands, but focuses on 14 brands with sales of over 1 billion euros – Namely Axe/Lynx, Dove, Omo, Becel/Flora, Heartbrand ice creams, Hellmann's, Knorr, Lipton, Lux, Magnum, Rama, Rexona, Sunsilk and Surf.

Investment Thesis

We reduced our price target from €46.00 to €41.00 per share mainly due to the Company’s sales being dependent on emerging markets. In 2015, 58% of sales came from emerging markets.

With the current market turmoil and global growth concerns, we took a prudent stance and reduced our forward price multiple in our model from 24x to 22x. This resulted in a change in our stance on Unilever from overweight to neutral.

Our neutral recommendation is mainly based on the following two assumptions. The first is that in the short term we find it hard to see sales pick up at a strong pace given the current environment. The second being margins have been improving mainly due to cost cutting rather than higher prices and we expect more of the same in 2016.

However, despite our short term concerns, we believe that in the medium to long term Unilever will continue to generate attractive returns for shareholders for the following reasons:

  • A portfolio of household names – amongst the strongest names in the portfolio are , Dove, Omo, Becel/Flora, Heartbrand ice creams, Hellmann's, Knorr, Lipton, Lux, Magnum, Rama, Rexona, Sunsilk and Surf
  • E-Commerce – Greater focus on e-commerce to increase its sales. We have seen the other companies benefit from this and we expect Unilever to do the same
  • Reduction in costs – Great emphasis on cost reduction through zero based budgeting. Zero-based budgeting is a method of budgeting in which all expenses must be justified for each new period. This instils greater control on expenditure
  • Operating Margins – Over the last five years, the company increased its operating margins year-on-year. We are confident margins will improve going forward as the company managed to reduce its operating cost margin over the years
  • Emerging Markets – Unilever has a high dependence on emerging markets. In 2015, 58% came from Emerging markets. We have seen accelerated growth in emerging markets over the years. In 2016, we are revising downwards are investments due to the reduction in global growth forecasts. However, we continue to assume an improvement in growth from emerging markets particularly in the ice-cream business which has been a strong contributor in the past to the positive performance of the Group
  • Free cash flow – We have seen an improvement in free cash flow 2015 which is above €90mln. Management can use this cash to pick up new businesses on attractive valuations or pass it on to investors through higher dividends or share buybacks
  • Dividend yield – Unilever is trading on an attractive indicative gross dividend yield of 3.10%