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Unilever Sales Rise Following Failed Kraft Bid

Unilever's first results following a strategic review earlier this year look positive, boosted by strong sales growth in Asia

Morningstar News Team 20 July, 2017 | 1:42PM

Consumer goods and personal care giant Unilever (ULVR) today reported growth in pre-tax profit in the first half of 2017 and said it is on track for another year of underlying sales growth ahead of the market. Earlier this year, Kraft Heinz bid to takeover Unilever but the bid was unsuccessful.

Unilever, which makes products including Marmite and Ben & Jerry's ice cream, said pre-tax profit in the first half of the year grew to €4.63 billion compared to €3.64 billion in the first half of 2016, as revenue rose to €27.73 billion from €26.28 billion.

Revenue was boosted by a 1.7% foreign exchange rate benefit, but underlying sales still grew by 3%. By division, underlying sales in Personal Care rose by 2.2%, while Home Care, Food and Refreshment sales were up 2.5%, 1.2% and 6.7%, respectively.

Unilever will pay a quarterly dividend of €0.36 per share in September. Unilever paid a quarterly dividend of €0.32 per share in March.

Morningstar Analyst View

For the first time in several years, Unilever is making a concerted effort to expand profitability, and we have conviction in the company’s margin opportunity. In spite of the seismic changes at both the consumer and the retail level, we think Unilever’s wide economic moat remains solid.

Strong sales growth in Asia meant that the Unilever modestly exceeded our expectations on the top line, said Morningstar equity analyst Philip Gorham. Significantly, the company saw an improvement in earnings.

Although organic growth remains below historical levels, the company revealed it has grown faster than the underlying market and has taken market share. Unilever's entrenched position in the supply chain of its retailers, is the source of its wide economic moat, or competitive advantage.

First-half underlying sales growth in the Asia segment of 5.5% took us by surprise, and was the only material difference from our forecasts.

We have raised our near-term forecasts for sales, earnings before tax, and earnings growth, and this accounts for more than half of our fair value increase.

Unilever is making structural changes to its operating model that we expect will lead to more efficient internal capital allocation, and the operating margin expansion showed the progress already made in that area.

With Reckitt Benckiser having just sold its foods division for an impressive 21 times earnings before tax, Unilever will no doubt be hopeful that it can realise a similar multiple for its spreads business. However, we estimate that first-half sales fell by 3.5% year over year, in contrast to the 5% growth achieved by Reckitt's food segment in 2016. Because of this, we doubt that, even in the current climate, Unilever's assets will be valued at such a multiple. We continue to assume that the business would be worth around €6 billion.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Unilever PLC4,212.50 GBX0.59
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