Our view: Unilever’s become boring ... witness yesterday's 'in line' interim
results. That’s the best tribute we can pay to the management of a
company that we used to regard as ineffectual at best. EPS growth is solidly
underpinned and cash conversion has improved substantially. That’s now
in the price: downgrade to Sector Perform.
Key points:
Understanding desultory TSR performance. At first glance we
were intrigued by Unilever’s 16% total shareholder return (TSR)
underperformance versus the consumer staples sector since Paul
Polman’s appointment as CEO in January 2009. In part that reflects the
precisely corresponding outperformance in the preceding four months, in
anticipation of his arrival. In part it also reflects, in our view, an excessively
sanguine attitude from investors prior to his appointment. As a result,
the significant improvement in both the quality and quantity of Unilever’s
prospects has not been fully reflected in its share price.
Improved prospects are in the price. That said, the shares have performed
quite well more recently (+10% relative since the beginning of 2014).
In consequence we believe that the share price now fairly captures the
group’s prospects. Yesterday's interim results did nothing to alter our
opinion; we forecast organic sales growth at the higher end of a 3-5%
target range, 40 basis points of annual EBIT margin growth and ongoing
cash conversion of 85-90%.
Shares are fair value. This yields an Adjusted Present Value (APV) of €42
(£36) in line with the current share price. This is not to belittle the effort
required to deliver these results; merely to point out that the market
now expects it. Consequently we reduce our recommendation to Sector
Perform.