unilever n.v. opinion

Unilever N.V. – Ticker: UNA 1st November 2016

Research Report – 1st November 2016

Unilever N.V.

Unilever N.V.

Opinion: Positve

Target: 42

CEO: Paul Polman

Ticker: UNA

Primary Exchange: Euronext

Sector: Consumer Staples

Industry: Consumer Products

Market Cap (B EUR): 115.624

52WK Range: 38.23 – 38.59

Current Stock Price: 38.18

Source: Bloomberg

Next Earnings Report Date: 26th January 2017

Source: Unilever

Unilever financials for the third quarter do not paint a positive picture, they show falling revenue year on year and a decline in Emerging Market turnover which is where most their turnover stems from.

This could be attributed to rising commodity costs and higher input costs in local currencies. These costs are being passed onto consumers, and in India has caused a lack in demand in their skin cleansing products.

The driver of turnover has been price instead of volume in the third quarter, showing a lack of overall demand for products, a negative sign for the company.

We believe that this may continue into 2017 as prices of commodities continue to look strong due to currency instability. Crude Oil prices for instance have risen over 50% this year. Unilever is exposed to multiple currency movements due to its multinational reach, which would affect earnings and sales.

On the positive side, the acquisition of Dollar Shave Club is a step in the right direction. The use of Unilever’s expertise gained in its other brands, coupled with the upwards directory of the razor subscription service in terms of turnover could help drive market share away from Gillette. The male grooming market is forecast to grow 3.3% through 2020 so getting on the bandwagon will help generate turnover. This also helps the company make a move of physical shelf space, which is becoming less powerful, and into e-commerce which is rapidly growing.

The partnership with Convoy will help reduce operating costs in North America and reduce the number of empty miles being driven – it will also help reduce their carbon footprint which is in line with Unilever’s sustainability focus.

We forecast that the top-line growth will be in line with competitors, and within the 3-5% aim that Unilever work towards.

Overall, although technical analysis predicted that there would be a drop in price we think that this will be only in the short term as turnover continues to be driven by price in this economic environment. Looking longer term we believe that sales will pick up in emerging markets and volume will increase, and that the stock price will increase looking to the end of 2017.


Contents ................................................................................................................................................................ 1

Company Review..................................................................................................................................... 3

Financials ................................................................................................................................................. 3

Fundamental Ratios ............................................................................................................................ 3

Turnover .............................................................................................................................................. 4

Dividend History .................................................................................................................................. 4

Industry Comparison ........................................................................................................................... 4

Growth Estimates................................................................................................................................ 4

Financials Review ................................................................................................................................ 5

Turnover Review ..................................................................................................................................... 6

Developed Markets ............................................................................................................................. 6

Emerging Markets ............................................................................................................................... 7

Price vs. Volume .................................................................................................................................. 8

Technical Analysis ................................................................................................................................. 10

Product Research .................................................................................................................................. 11

Billion Euro Brands ............................................................................................................................ 11

Innovation ......................................................................................................................................... 11

Seasonal Dependence ....................................................................................................................... 11

Competitors .......................................................................................................................................... 12

Google Mentions – Just Mayo ...................................................................................................... 12

Turnover by Sector ............................................................................................................................ 12

Unilever ......................................................................................................................................... 12

Proctor and Gamble ...................................................................................................................... 13

Reckitt Benckiser ........................................................................................................................... 13

Competitor Review ........................................................................................................................... 14

Acquisition Season ................................................................................................................................ 15

Dollar Shave Club .............................................................................................................................. 15

Seventh Generation .......................................................................................................................... 16

Convoy Partnership ........................................................................................................................... 16

Unilever In the News ............................................................................................................................. 17

Israel Settlement ............................................................................................................................... 17

Marmite-gate .................................................................................................................................... 17

Appendix ............................................................................................................................................... 18

Disclaimer.............................................................................................................................................. 18


Company Review 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 is the world's largest producer of food spreads, such as margarine. One of the oldest multinational companies, its products are available in around 190 countries.

Unilever owns over 400 brands, but focuses on 13 brands with sales of over 1 billion euros: 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 N.V., based in Rotterdam, and Unilever plc, based in London. The two companies operate as a single business, with a common board of directors. Unilever is organised into four main divisions - Foods, Refreshment (beverages and ice cream), Home Care, and Personal Care. It has research and development facilities in the United Kingdom (2), the Netherlands, China, India and the United States.

Source: Wikipedia

Financials Fundamental Ratios


Source: Zacks Investment Research

Turnover FISCAL QUARTER 2016 (FISCAL YEAR) 2015 (FISCAL YEAR) MARCH €12.5bn €12.8bn JUNE €13.7bn €14.2bn SEPTEMBER €13.4bn €13.4bn DECEMBER (FYE) €12.9bn TOTALS €39.7bn €53.3bn

FYE = Fiscal Year End

Source: Unilever

Dividend History FISCAL QUARTER 2016 (FISCAL YEAR) 2015 (FISCAL YEAR) MARCH €0.3201 €0.302 JUNE €0.3201 €0.302 SEPTEMBER €0.3201 €0.302 DECEMBER (FYE) €0.302

Amount is per share

Source: Unilever

Industry Comparison Industry: SOAP&CLNG PREPS

UNILEVER INDUSTRY S&P500 HIST. EPS GROWTH (3-5 YRS) NA 2.93 % 7.57% PROJ. SALES GROWTH (F1/F10) -0.23% 1.08% 2.63% NET MARGIN NA 11.21% 9.70% RETURN ON EQUITY NA 20.32% 15.84% DEBT/CAPITAL NA 25.06% 42.35% P/E (F1) 20.33 21.81 17.84 PRICE/SALES NA 3.10 2.26 PRICE/BOOK 4.20 4.19 2.92 PRICE/CASH FLOW 12.40 18.28 12.24 YTD % PRICE CHANGES -3.81% 2.97% 6.02%


Growth Estimates

UNILEVER CURRENT YEAR (12/2016) 1.80 NEXT YEAR (12/2017) -7.60 PAST 5 YEARS 0.60 NEXT 5 YEARS 5.70 PE 20.33 PEG RATIO 3.54



Financials Review Unilever’s financials show that revenue has fallen or stayed level each quarter in 2016 when compared to 2015 – this is a negative and could show growth stagnating in some areas of the business. We will go into more detail regarding turnover by region/sector later in this report (see Turnover Review section).

On the positive side the dividend has stayed steady throughout 2015 and has risen in 2016, showing that they are committed to giving back to their shareholders. Some investors saw these dividends as sufficient income to resemble a bond and viewed Unilever shares as bond proxies. This made the shares appealing in times of exceptionally low rates and quantitative easing pushing bond yields down.

P/B compared to the industry is in-line, with the P/E reaching similar levels – suggesting that the company is competitively priced against competitors.


Turnover Review

Unilever relies on revenue generated from emerging markets (EM) for profitability, with more reliance on EM than on developed markets (DM). Since CEO Paul Polman shifted focus away from food brands in 2015, which showed slow growth, Unilever has focused more on health and beauty brands which fall under the ‘Personal Care’ banner, their biggest revenue driver when you look at the sector breakdown.

Developed Markets

Source: Unilever

Unilever turnover in DM has been relatively constant throughout quarters and when compared to 2015. This shows steady turnover, with the slightly elevated 9-month number in 2016 when compared to the previous year hinting at an element of growth. These numbers derive from strong innovation in deodorants dressing and ice-cream in North America, which have performed well in a highly competitive environment, which has covered the slow down the decline in growth for spreads. In Europe, there has been good momentum in Netherlands and Spain, and parts of Central Europe. There have however been high promotional intensity adversely impacting Home and Personal Care performances, and a contraction of the margarine market weighed in on Foods growth, most notably in the United Kingdom and France. (Source: Unilever)


Emerging Markets

Source: Unilever

Emerging market turnover has stagnated in 2016 when compared to the previous year, which each quarter showing numbers below or level with the corresponding numbers in 2015. This is an important area for Unilever with most of their turnover coming from EM. EM turnover has primarily come because of an increase in price, due to higher commodity costs and higher input costs in local currencies. Turnover due to volume has decreased, perhaps indicating that items considered more essential are still being bought even at a higher cost, but there has been lack of demand for other items. EM countries do vary greatly however, so generalisations would have to be taken with a pinch of salt.

In India, prices in skin cleansing increased due to commodity costs, damaging consumer demand. The Philippines showed another quarter of double-digit growth whilst Turkey and South Africa delivered price-led growth. Sales in China were slightly down due to intense price competition from local brands in laundry, there was also some destocking to due channel shift to e-commerce. Turnover in Latin America has been driven by price to recover higher costs in local currencies. Volumes declined as consumers reacted to the impact of the harsh economic environment. (Source: Unilever)


Source: Unilever

Price vs. Volume As I have mentioned above, turnover has been driven by price instead of growth. I would continue to see this going into 2017 due the multinational reach of the company and its exposure to FX rates. These currency movements would squeeze the ability of consumers to generate sales due to price increases from Unilever as the cost of the raw materials required to manufacturer their products increases (as shown in India). In addition to FX, the price of Oil would impact profits, and with the price of Brent increasing from around 28 at the start of the year to yearly highs of around 50, there would need to be a considerable turnaround to help cut costs here.

Source: Unilever


Source: Unilever


Technical Analysis

A negative pattern was formed on the weekly graph from October 15 to October 16, which led to a downward slope in the price. This price broke the upward sloping support line giving room to further drops in the price level. I would look for this to continue falling to the long-term support line around 36.5 (around fib 0.5). Unilever have come under pressure recently with a drop in their turnover in EM highlighted in their Q3 results, and I see this to continue to be an issue due FX prices making it more expensive to produce goods, with those costs passed onto consumers.

https://uk.tradingview.com/chart/UNAA/I4YJ2jEQ-Unilever-UNA-Short/

Data Source: TradingView as at 2nd November 2016

https://uk.tradingview.com/chart/UNAA/I4YJ2jEQ-Unilever-UNA-Short/


Product Research

Billion Euro Brands

Unilever has over 400 brands, but its focus is mainly on 13 brands with sales of over 1 billion euros. These brands are as follows:

Axe/Lynx Hellmanns Rexona/Sure Blue Band Knorr Sunsilk Dove Lipton Surf Flora/Becel Lux Heartbrand Iced Creams Omo

These brands make up most of the turnover for Unilever and are truly multinational. It is vital that Unilever ensures growth in these brands as a failure to do so would have drastic consequences on the company’s ability to generate turnover.

Innovation Unilever prides itself on its R&D facilities and its innovation. This innovation is key to these brands and keeping their market share in their relevant segments.

An example of this innovation, and driving brands forward, is Axe/Lynx relatively recent foray into men’s hair styling. Although they already have haircare products in their brand portfolio, moving Axe in this direction meant they could capitalise on what is already a recognisable brand that is reportedly in 1 one of every 4 households in the UK (Source: Unilever). Looking to expand their customer base which is currently males age 16-24, they also released a women’s fragrance.

Developing their Lipton brand, they introduced a unique patent process in 2014 which featured a new way of tea production – designed to release the natural essence of tea.

Seasonal Dependence Out of the 13 billion euro brands, there is a seasonal dependence on one of the most recognisable, Heartbrand Iced Creams. Products under this umbrella include Carte D’Or, Magnum, Cornetto, Solero, Soft Scoop, and Vienetta. These products will obviously do better in summer months where weather is hot, and perform poorly in winter months. It is critical that brand messaging and advertising is done correctly and at the right time, which can be tricky given the temperamental factor out of their control, weather. If there is a short summer, then sales in this brand will fall, luckily we have seen a string of record breaking temperatures in recent years which help drive growth, but this could change.


Competitors To maintain their market share Unilever needs to stay ahead of competitors. In many of their billion dollar brand segments they are one of the elite, most recognisable companies, examples being Hellmann’s (mayonnaise), Sure & Axe/Lynx (Deodorants), Persil/Surf (Laundry), Bertolli (Olive Oil) and much more. They are also trying to venture in to new markets with acquisitions such as Dollar Shave Club (see the acquisition section for more information). One example where Unilever failed to ensure the share for one of its most iconic and most sector associated brands was with the Helmanns’s/Just Mayo lawsuit back in 2014 – which helped increase the rivals hold on the market. To claw this back, Hellmann’s have however released an egg-free mayo to compete. Unilever clearly have the resource, balance sheet, brands and ability to keep away competitors, and it is imperative that this is done.

Google Mentions – Just Mayo

Source: Google Trends

Turnover by Sector

Unilever Below is the turnover by sector, with the sectors being defined by Unilever:

TURNOVER (EUR BN) ESTIMATED TURNOVER IN USD UNILEVER TOTAL 13.4 15.0 PERSONAL CARE 5.2 5.8 FOODS 2.9 3.3 HOME CARE 2.5 2.8 REFRESHMENT 2.8 3.1

Source: Unilever Source of Exchange Rate: Yahoo Finance as at 30th September


Proctor and Gamble Below is the turnover by sector, with the sectors being defined by Proctor and Gamble:

TURNOVER (USD BN) P&G TOTAL 16.52 BEAUTY (PC) 3.00 GROOMING (PC) 1.66 HEALTH CARE (PC) 1.86 FABRIC & HOME CARE (HC) 5.30 BABY, FEMINE AND FAMILY CARE (PC) 4.60 CORPORATE 0.11

Source: P&G

I have broadly put these into Unilever’s buckets for the sake of comparison – I have indicated where have put these, note I have replaced Refreshment with Corporate as these we not clear to allocate:

TURNOVER (USD BN) P&G TOTAL 16.52 PERSONAL CARE 11.11 FOODS 0.00 HOME CARE 5.30 CORPORATE 0.11

Reckitt Benckiser Below is the turnover by sector, with the sectors being defined by Reckitt Benckiser:

TURNOVER (GBP BN) TURNOVER (USD BN) RB TOTAL 7.13 9.26 HEALTH (PC) 2.37 3.07 HYGIENE (PC) 2.98 3.86 HOME (HC) 1.33 1.72 PORTFOLIO (INCL. FOOD) (F) 0.46 0.60

Source: RB

I have broadly put these into Unilever’s buckets for the sake of comparison – I have indicated where have put these, note I have replaced:

TURNOVER (GBP BN) TURNOVER (USD BN) RB TOTAL 7.13 9.26 PERSONAL CARE 5.35 6.94 FOODS 0.46 0.60 HOME CARE 1.33 1.72 RB TOTAL 7.13 9.26


Note that all the above use a rough sector allocation method where they have been put into Unilever buckets. Some totals are zero as an exact allocation could not be made using the data in this report.

Competitor Review It is hard to properly compare the sector revenue between the competitors without properly allocating each company in the portfolio’s, and because of the diversity within these companies, but it gives us a broad idea of who is leading in each sector. We can see that P&G is clearly leading in Personal Care, whilst Unilever has the highest turnover in the Foods space. Home care is more of a competitive area where we can make more exact conclusions due to Home Care being a bucket classified by all 3 companies, and the data shows us that P&G is ahead. Overall, P&G reported the highest turnover for Q3.


Acquisition Season Intro for acquisition

ACQUISITION/SALE DATE COMPANY EST. COST (USD)

MAIN AREA OF STUDY

ACQUISITION Aug-16 Dollar Shave Club 1 billion Personal Care (Mens Grooming)

ACQUISITION Oct-16 Seventh Generation 600-700 Million

Home Care & Personal Care

ACQUISITION Not Yet Complete

Blueair NYC Home Care

Source: Unilever for Acquisition/Sales

Source for Estimated Cost – Fortune (Dollar Shave Club), Bloomberg (Seventh Generation, Blueair)

Dollar Shave Club

As mentioned previously, one of Unilever’s key competitors is P&G who own arguably the biggest shaving brand, Gillette. To try and get into this market they have bought fast growing razor subscription service Dollar Shave Club. They paid 5 times the projected 2016 earnings, and over double the median multiple for the company in a deal which some branded as overly expensive.

The bet is a bid by Unilever to try and stay competitive and relevant in a market where they are far behind P&G:

It is forecast that the men’s grooming market will grow about 3.3% a year through 2020r, which outpaces the growth in the overall beauty and personal care market (Source: Bloomberg Intelligence and Euromonitor). In comparison, the packaged food market is only targeting 2.6% expansion per year, also up until 2020. Dollar Shave club has lost some market share in 2015 as Gillette has started to offer online subsriptions. An area where Unilever has been impacted is the switch to e-commerce (in China for example), and this acquisition will help them compete and perhaps leapfrog some competitors in the race to online convenience shopping, although it could then bring them into direct competition with Amazon as they step up there offering. It is worth noting that when they bought Dollar Shave Club their share price rose, when normally if a company is bought at a high multiple it would be expected to fall.


Seventh Generation Seventh Generation is green household company based in Vermont, the home of another Unilever brand, Ben & Jerry’s.

Before this deal was made there were also talks that Unilever was looking to buy The Honest Company, the eco company co-founded by Jessica Alba. This company is a rival of Seventh Genreation.

In other comparisons to Ben & Jerry’s, it is suspected that after the purchase the company will be left to run as a semi-independent business. “One of the things they really wanted to do is not impact or change who we are,” says Seventh Generation CEO John Repongle.

Unilever has a big footprint in the eco & sustainability space, so this was naturally a good fit for both companies. The graph below was from a survey of experts in sustainability in different regions, Unilever was the most widely mentioned.

Source: SustainAbility.com

Convoy Partnership Convoy is a company which specialises in trucking – and offers services where trucks can be booked and monitored via GPS, they also pride themselves on outstanding customer service.

The partnership for Unilever North America is another aim at lowering the carbon footprint of Unilever by using the industry leading reliability and data, with the aim of less empty miles and a reduced operating cost.


Unilever In the News

Israel Settlement In August, it was found that Unilever was selling cornflakes that had been tainted with Salmonella This led to the Health Ministry suspending their license and ordering daily inspections at their plant. After inspection, it was found that the company had been negligent.

Marmite-gate As shown earlier in this report, much of the turnover this quarter was due to price and not volume, and this increase in price, 10% in this example, led to a temporary boycott of some Unilever brands by supermarket mega-chain Tesco.

These increases were blamed on the fall in value for the pound, however one of the products at the centre of this was Marmite – even though the ingredients in this love-it-or-hate-it brand are manufactured in the UK.

Tesco retaliated to the price rises by removing Unilever products from its website, and threatened that items could disappear from supermarket shelves.

After Unilever shares fell 3.4% and Tesco slid 3% a deal was made between the two companies which meant the supply of products could continue.

Source: Kantar WorldPanel – 12 weeks ending 09.10.16

As we can see above, it was in Unilever’s interest to confirm this dispute, as Tesco’s market share makes them the UK powerhouse, and if they did not stock Unilever’s products it could be detrimental to the company.


Appendix Revenue - Revenue is important as generating capital is essential for growth. Here I would look for steady revenue numbers, or numbers that are increasing.

EPS & Earnings Surprise - Earnings Per Share (EPS) tells us how much money is flowing down to stock holders, telling you how much profit is made per outstanding share of stock.

Before companies announce their earnings each quarter, analysts will make predictions as to what they think the EPS will be. These predictions are often used as a benchmark, and if the actual EPS comes in higher it is generally a good sign for the stock price. A company that has positive surprises would be seen to be beating its expectations.

Earnings Forecast - As mentioned previously, each quarter analysts will forecast what EPS will be. I would look for these numbers to stay constant or increase to show that expectation future profitability is strong.

PEG Ratio - Whilst reviewing Price to Earnings numbers is useful, the numbers do not consider growth. Although a low P/E may present a stock as attractive, if it is not growing the stock’s value is unlikely to rise. The PEG Ratio is calculated by dividing the stocks P/E by its expected 12-month growth rate. A score of above 1 is considered positive.

Insider Trades- Insider trading provides a glimpse of how confident the managers of the company are for its prospects. If the management are buying stock it could indicate the smooth running of the company and this would be considered a positive sign. It is important to note that management could sell shares for reasons other than internal struggles within the company e.g. to meet personal liabilities.

Industry Earnings - Whilst it is useful to see data on the company, it is also important to have an idea of how it is performing relative to its peers. Numbers higher than peers would indicate outperformance of the market; however, it is important to note that sectors can be broad which leads to vastly different data.

Disclaimer Please note that all information is provided for information purposes only and we do not warrant its completeness or accuracy. Everything is our own opinion and the data used is subject to change. We do not trade or hold positions in this stock. Any material is not intended to be used when making decisions around the purchase or sale of currencies or securities and we are not liable for any losses incurred as a result of using the information. We are not affiliated in any way with this company. Past performance is not a guide to future results

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Empiah Analysis

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