About the Company

Unilever owns over 400 brands, but focuses on 13 brands with sales of over €1 billion: Axe/Lynx, Dove, Omo, Becel/Flora, Heartbrand ice creams, Hellmann's, Knorr, Lipton, Lux, Magnum, Rama, Rexona, Sunsilk and Surf. It is a dual-listed company consisting of Unilever NV, based in Rotterdam, and Unilever plc, based in London.

Investment Thesis

We increased our price target on Unilever from €43 to €56.

Unilever is currently trading on a P/E of 27.6x. Although we are confident in the outlook of this company, we believe this multiple is pricing in a lot – and not discounting anything which could go wrong in the interim. Looking at historical P/E averages, the shares traded on a P/E of 19x.

We see the P/E multiple of 19x being too conservative and believe the shares should be trading on a future P/E of 25x.

Looking at 2017 earnings forecasts, we derive the following price targets:

Rationale for increase in price target

Removal of restructuring costs – The market expects Unilever to soon issue a restatement for 2016 that excludes restructuring charges from its core margin and EPS. The 2016 EBIT margin to be restated from 15.3% to 16.4% and EPS from €1.88 to €2.03

• Expectations to continue its share buyback program – It is unlikely that the company will be spending large amounts of cash for acquisitions at this stage in the cycle. We now expect Unilever to use its cash to buy its own shares and continue rolling over its buyback program
• Growth in Emerging Markets – Unilever is dependent on emerging markets, with a sales exposure of 58%. Asia grew 7% in Q1, which was double consensus, driven by much better pricing. We think this improving momentum can be sustained
• Earnings Per Share – For the past four to five years, Unilever has delivered 7% operating EPS growth in constant currency, which increases to c.10% including FX. With recent signs of OSG improving and margin expansion stepping up substantially, we think the underlying EPS performance could increase to double-digits
• Margins – We expect margins to continue to increase in the years ahead due to higher sales and lower costs
• Previous interest from Kraft to take over Unilever – In February 2017, Unilever rejected a $143bn takeover approach from Kraft Heinz, the food conglomerate backed by three Brazilian billionaires and Warren Buffett

Unilever CFO Graeme Pitkethly said on the 1Q17 analyst conference call:

“I think it's fair to say that the prospects for the global economy are looking a little brighter than they have done for a while. While last year's GDP growth was the lowest since 2009, the forecast for this year is now looking a little better. Employment levels in the developed markets are improving, and many of our key emerging market currencies like India, Brazil and Indonesia appear to be bottoming out. Commodity inflation is returning. And while this adds to the cost pressures for us particularly in the first half of this year, it will, of course, be better news for the economies of the producing countries themselves, many of which contain large Unilever businesses.”

Conclusion

We are confident that Unilever is well positioned to benefit from future growth particular due to its strong reliance on emerging markets. We also expect margins to continue to improve going forward mainly due to lower costs. Unilever should be a core holding in a well-diversified portfolio.

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.