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Unilever Among The Most Exposed To Slowing Global Demand

Unilever (NYSE:UL) was formed in 1930 when the Dutch margarine company, Margarine Unie (itself created through a series of mergers in the 1920s), merged with the U.K.’s Lever Brothers Ltd (which had been founded by William Hesketh Lever in 1885 to produce soap and had subsequently diversified into fish, ice cream and canned foods). For a variety of reasons (including tax), the two companies pooled their interests through a business merger instead of a legal merger. Two parent companies were set up (Unilever Plc and Unilever NV (NYSE:UN)) and, to allow the companies to operate as though they were a single legal entity, a series of agreements was put in place, including the equalization agreement stipulating the relative economic rights of owners of the NV and Plc shares in the combined Unilever group. This was simplified considerably in 2006 when shareholders voted in favor of establishing a one-for-one equivalence of the NV and Plc shares.

The company’s five year performance can be seen below,

Recent Fundamental Highlights

The company missed on sales in the Q3 of 2014 as sales growth was only 2.1% well below the company wide consensus of 3.7%. The main cause of this was sales volumes. The company expected an increase of 1.8%, but fell short by only reaching 0.3%. Sales volumes were down in Asia and Europe as well as in the refreshment and personal care product lines. Poor weather and destocking in China appear to be the mains culprits and the company expects no real improvement in the markets to year-end.

Secondly, Unilever has announced the creation of a standalone company in developed markets (Unilever Baking, Cooking and Spreading) with the aim to increase focus and accelerate decision-making. Sales of total spreads were about 3.97B (7% of company total), out of which approximately half was in developed markets. Unilever denied the move would lead to a sale or a spinoff the business which we interpret as a assign management will try to turn around the business before considering alternative options.

Management expects a slight pick up on industry demand to slightly above 2%, driven by emerging markets at 4%. Europe and North America are expected to remain challenged with potential for deflation. Management also reiterated the ambition to deliver top and bottom line growth, articulating drivers of savings as the main catalyst (increased marketing efficiency, discipline in overheads, etc.).


Investors should focus on the company’s ability to fix their home care margins and establish long-term confidence in South East Asia.

While laundry growth has been strong, management acknowledged that margin performance over the past years (dropping to 5% in 2011) was hindered by high completion in this category in emerging markets. The company needs to upgrade the business unit in terms of product quality and distribution improvements. Home care is still expected contribute positively to total margins in FT15 according to management. The simplification of packaging and formulas and the roll out of low cost model and media efficiency will be key margin drivers.

UL has acknowledged the recent slowdown in the South East Asian market in terms of volume growth has been affecting the company. It has been caused by increased competition from multinationals and local brands. The company sees opportunities for growth driven by white spaces, new emerging segments (ex. mens grooming, hair postwash) and extended presence. Management also highlighted the need to remain cost competitive to weather the challenging environment.

Economic Moat Trend

The company’s net profit margins have been highly erratic over the past couple of years and will be an important focus for the company in the coming years. The North American business is on the journey by re-shaping the portfolio to focus on costs and agility. While the company continues to make good progress in personal care (which now accounts for 55% of sales compared to 38% in 2009) growing ahead of the market, the spreads category remains a work in progress. Further more ice-cream is still at a “turnaround stage” after a tough 2013. Aligned with UL’s global strategy and in the context of a tougher market environment, the company emphasized the need to deliver cost savings.

Major Risks

Further weakness in Asia and Europe could significantly affect shareholders. Asia, the Middle East and Russia grew 3.1% as volumes were impacted by weaker market conditions, particularly the sharp slowdown in China due to substantial de-stocking. Western Europe weakened significantly to -4.3% due to price deflation across many markets such as France and Germany.

Investment Rationale

Amid a challenging market, management reaffirmed its ambition to deliver sustainable top and bottom line growth with two priorities: the creation of a standalone spreads business and a target to double margins in home care.

Analysts continue to see poor visibility ahead as markets remain tough and volatile while there exists the risk of price pressure further denting performance. Unilever currently trades at $42.01 (closing price as of jan 22) with very limited upside in the near to medium term as the company remains exposed to lack of growth in developing and developed nations

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