Unilever shares are up 30 per cent year-to-date, an excellent performance especially when compared to the Euro Stoxx 50 which is up 12 per cent over the same period. The question is, does the rally in these shares still have legs? My answer is yes, this is why.
About the company
Unilever is a British-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 - Axe, Dove, Omo, Flora, Heartbrand ice creams, Hellmann's, Knorr, Lipton, Lux, Magnum, Rama, Rexona, Sunsilk and Surf.
Attractive margins
My overweight stance on Unilever is backed by the view that management is on track to continue improving the EBIT margin of the Group in the coming years. The improvement in margins is expected to come mainly from increased economies of scale as well as the introduction of new products with higher margins.
Economies of scale are brought about by an increase in production. Economies of scale have been reducing the operating expense margin of the Group over the years and I expect this positive trend to continue into the future.
The increase in production is expected to be driven by an increase in demand across all regions, particularly from emerging markets with specific reference to China and Latin America. With a continued increase in the middle class as well as an improvement in global growth, Unilever is well positioned to take advantage of this.
Production of new products with higher margins is also a competitive advantage of the Group. Unilever has benefitted from this over the years and I expect this to continue in the future.
A pick up in sales
Apart from the improvement in margins, I also expect the top line of the Unilever to continue to improve especially from emerging markets. I expect this positivity to continue in the years ahead.
The increase in sales is expected to come across all regions as global growth improves. However I expect additional contribution from emerging markets as the middle class continues to growth and demand for Unilever products continue to increase.
Accelerated expansion of the middle class coming from developing countries – According to a study by the OECD, the global middle class will increase form 1.8bln in 2009 to 3.2bln in 2020. Unilever has set strategic positions in developing markets to take advantage of this.
Attractive Dividend yield
The shares are trading on am indicative gross dividend yield of 2.9 per cent. With the 10-year bund yielding 0.5 per cent, Unilever offers an attractive distribution of returns to shareholders for those investors who are not satisfied with the risk-reward of their bond portfolio.
Concerns
Although most companies are concerned about global growth due to a slowdown in emerging markets, Unilever has been improving its sales in the developing world. Although we are of the view that the worst is behind us, if global growth concerns re-emerge, it could have a negative consequence on both the top line and profitability of the Group.
Another concern is the high P/E multiple Unilever is trading on which is currently 24x. However, I am not too concerned about this considering the conservative the nature of the business which reaches out to all social classes and classifying it as a consumer staples stock.
It is also trading below the median multiple of the sector which is currently 30x and below that of Danone and Reckitt Benckiser which are trading on a PE of 41x and 29x respectively.
Conclusion
With an improvement in demand across all regions, particularly emerging markets, focus on new high margin products and a reduction in costs due to benefits from economies of scale, I expect Unilever to generate positive returns for shareholders in the medium term.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.