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.

Unilever investment thesis

Unilever reported a sales figure of €12.5 billion, which represents a 12 per cent reduction from the €14.2 billion figure reported in Q115. However, on a like-for-like basis, sales increased by five per cent generated mainly from emerging market which account for 60 per cent of the revenue figure of the group.

Though when just looking at volume growth without taking into account an increase in the sales price, the situation is more worrying. Management reported a reduction in volume growth in Europe, weak growth in emerging markets and flat volumes in the US.

The slowdown in volume growth is concerning and we do not expect to see an improvement anytime soon. For this reason we stick with our neutral recommendation and price target of €41 per share.

However, we continue to like Unilever 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 market. In Q116, 60 per cent 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 in Q116. 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

Our concerns:

• Disinflationary environment in Europe

• Global growth concerns

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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.