consumer staples sector - · pdf fileunilever is currently pursuing a sustainable business...
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Investment Thesis
With a low beta, a strong dividend yield of 3.5% and an increase of operating profit by 6% to $8 billion, we see Unilever as a defensive income investment for the SMF portfolio.
It is a stable stock as the worlds third largest consumer goods producer operating in more than 190 countries worldwide serving more than 4.5 billion people and on any given day, two billion people use Unilever products .
Growth ahead of markets: Underlying sales growth 2.9%, with volume 1.0% and price 1.9%. Globally, markets grew by around 2.5% with flat volumes. International growth remains a catalyst for Unilever as middle class grows.
Strong free cash flow: Free cash flow of €3.1 billion after €0.8 billion of tax on disposal profits at the end of 2014.
Improved core operating margin: Operating margin is up 40bps to 14.5%.
Adapting their portfolio: Creation of standalone company in developed markets. 3.97 billion of sales, about 7% of company previously operated in developing markets.
Why we are looking to add Unilever to the SMF Portfolio?
Consumer Staples Sector Overview• A fall in oil prices: Consumers have more discretionary income and consumer confidence hit
a new high in December. Lower gasoline prices in isolation give consumers the equivalent of a near-2-percent pay rise in 2015. Companies will also benefit from the short term falling energy prices.
• Eurozone deflation: In December consumer prices across the Eurozone fell by 0.2%. The ECB has responded by announcing a 1.1 trillion euro quantitative easing program to counter the threat of a deflationary spiral.
• The slowdown in emerging markets: China’s growth was 7.4% in 2014 and was its weakest in 24 years.
• Currency devaluation: Staples companies respond to this currency movement by raising prices and minimizing the impact of a depressed currency value. While corporate profits may suffer initially, currency depreciation historically has not been a long-term headwind for companies in the sector.
• As interest rates rise, consumer staples tend to underperform. There is much speculation as to whether the Federal Reserve will raise interest rates in 2015. While the US economy has improved, inflation has dipped below the Fed’s target rate of 2%. The Fed remains cautious over low inflation rates however it views the energy-driven cool-off in inflation as transitory.
Company Profile
• Unilever is a global world leader within the fast-moving consumer goods industry with a turnover of €48.4bn in 2014.
• The company has over 400 brands, 14 of which generate sales in excess of €1 billion a year. More than 2 billion consumers worldwide use a Unilever product on any given day. Operate under three distinct product categories.
• Food and drink including Ben & Jerry’s, Walls (HB) and Knorr. Home Care made up of brands such as Surf, Domestos and Cif. Personal Care includes industry leaders such as Dove, Axe (Lynx), Radox and Vaseline.
• Emerging markets now account for 57% of business.
• Company has existed in its current form since 1930. More than 174,000 people work for Unilever.
• Introduction of the Sustainable Living Plan in 2010. Targets halving Unilever’s environmental footprint and embedding sustainability into every part of the value chain (reduced waste impact by 11% since 2010).
Sales Breakdown
By Geographic Region (€ bn)
Asia/AMET (41%)
The Americas (32%)
Europe (27%)
Unilever’s Competitive Advantage
Unilever is currently pursuing a sustainable business model which will benefit its brand image in the eyes of consumers:
• CEO Paul Polmon at Davos spoke about Unilever becoming a B Corp and commit to social and environmental goals.• Unilever places a huge emphasis on research and development as a method of increasing product quality and sales
growth. The company has recently spent £200 million in expanding the UK Port Sunlight hub on r&d for manufacturing, innovation and information technology.
•At at the current rate of sales growth, it will take Unilever another 15 years to hit the medium-term target set in 2009 of doubling sales to €80bn. Core operating margins are increasing – up to 14.5% last year from 12.8% the year before.•Unilever’s profit growth was better than expected. A 5 per cent rise in net profit to €5.5bn was achieved mainly through cost-savings which will benefit the companies profits in the long run.
•Unilever is currently expanding rapidly into developing markets;• It is predicted that by 2025 Europe and North America will only account for 14.06% of the worlds population thus the
expansion of Unilever into developing markets can help cement its position. - Unilever’s sales in developing markets is significantly more than its competitors and currently stands at 57% of their sales mix up from 47% in 2008. Their goal is to reach 80%.
• The strengthening dollar will suppress the growth of rival firms particularly P&G in emerging markets which will make it easier for Unilever to capture market share in these crucial markets.
Competitors
Nestle Procter and Gamble
Kimberly –Clark (KMB) Reckitt Benckinser Group plc
• KMB specializes in personal care products, most of their brands fall into this category.
• KMB is also smaller than the other companies, it has 57,000 employees and a market cap of 39.84bn.
• P/E is 26.98 compared to Unilever at 20.7.• Unilever is currently undervalued compared to its
competitors.
• P&G has a market cap of 231 billion and 118,000 employees.
• It operates in 118 countries and competes with Unilever in the consumer goods market.
• The company’s EV/EBITA is 14.03 compared to Unilever Nv 14.78 and Unilever plc of 14.33.
• The product portfolio consists of beverages such as coffee or water (Nestlé Waters), to baby and health foods (Nestlé Nutrition) and sweets and snacks (Nestlé confectionery sector).
• Nestlé's net sales worldwide are 98,353bn.• 2015 forecast consists of a drop in sales, resulting from the increased
value of the Swiss Franc and a decrease in competitiveness in theglobal market.
• Reckitt Benckinser Group have operations in 60 countries and consumers in over 200 countries with a market cap of 60.98 billion.
• The portfolio consists of products in the health, hygiene and home markets.
• EPS for RBG year end 2014 came in at 5% compared to Unilever’s 8.6%.
SWOT AnalysisStrengths Weaknesses
Opportunities Threats
• It has a deep and broad portfolio of brands and a diversified product range, which makes it uniquely, positioned to tap into the changing consumer preferences across the world.
• Its Research and Development initiatives are heavily funded and manage to bring to the market innovative and cutting edge products.
• Significant economies of scale arising from 174,000 employees and a turnover of €48.4 Billion in 2014.
•Over supply of products in the South East Asia Market. Revenue lower than forecasted due to the decline in sales volumes sold. However, destocking in China is now complete.•Decreasing demand for products in many markets
due to economic risk and political instability.
• Intense competition in a rapidly changing environment can negatively impact Unilever’s market share.
• Unfavourable Currency Fluctuations.• Continued weak global economics growth
and inflation figures will constrain sales growth.
• Unilever has a good track record of social and environment responsibility which will attract younger consumers.
• Weakening euro and falling energy prices presents opportunities for Unilever to increase sales.
• Capturing the “Newly Affluent Trillion Dollar Consumers” and increasing incomes of middle classes in China and India means that it has a golden opportunity to leverage its huge and growing consumer base.
Risk
1 Yr 2 Yr
Expected Return 6.79% 6.23%
Standard Deviation (volatility) 15.76% 15.78%
Skew 0.087608 -0.05009
Kurtosis 1.018444 1.273379
Beta 0.843086 0.937343
RSQ 0.267525 0.341802
Sharpe 0.028686 0.020102
5% VaR 18.42%
1% VaR 27.85%
Risk EvaluationKurtosis
• The value of 3 represents the normal distribution. The higher the value the more likely are the extreme values in the stock return distribution meaning the more likely huge losses or gains are going to occur. However as the kurtosis is below 3 it indicates that extreme values are less likely to occur.
Skew• It is close to zero
Expected, Standard Deviation and Sharpe ratio• Sharpe ratio can greatly summarise the effects of volatility and the expected return as it is dependent on the two
variables. The general rule is that Sharpe ratio of 1 or above is good, 3 being excellent. The bigger the Sharpe ratio the better as you get more expected returns in comparison to the risk taken.
Beta• As you can see beta is below 1 meaning that the stock will have lower swings in comparison to the market.
However, if the market will perform well Unilever is not likely to grow as fast as the index that we compare it against.
R-squared• Actually R-squared is fairly low, it indicates that the Unilever stock price performance is not in line with the index,
therefore the beta measure could be ignored
VAR• VAR, we can say that we are 95% confident that we are not going to lose more than 18.42% in a given year and we
are 99% confident that we are not going to lose more than 27.85% of the stock value in a year.
Comparable Company Analysis
ComparableUnilever
NVUnilever
plc Nestle SAReckitt Benckiser
Group PLCProcter &
Gamble Co Peer Average
Price $42.03 $45.30 $77.01 $89.05 $85.39 $74.60
Market Cap 128.05bn 126.22bn 247.67bn 60.98bn 231.19bn 166.97bn
Beta 0.43 0.55 0.66 0.54 0.42 0.69
P/E 20.7 20.7 23.8 21.5 25.1 22.97
Forward P/E 21.14 21.51 21.08 23.38 21.29 26.85
P/B 3.4 7.9 3.9 6.4 3.6 4.3
Price/Sales 2.30 2.22 2.55 4.12 2.87 2.96
EV/EBITDA 14.78 14.33 15.15 15.55 14.05 14.88
Dividend Yield 2.9% 3.5% 3.0% 2.5% 2.9% 2.8%
EPS 0.72 1.8 1.52 1.13 1.07 1.11
Financial AnalysisUnilever NL Ratios 2013 2012 2011 2010 2009 2008
Profitability
Gross Margin 41.3% 40.2% 39.9% 41.5% 41.8% 47.3%
EBITDA Margin 16.4% 16.1% 15.7% 17.2% 17.3% 16.9%
Operating Margin 15.1% 13.6% 13.8% 14.3% 12.6% 17.7%
Net Margin 10.6% 9.4% 9.7% 10.4% 9.2% 13.0%
DuPont/Earning Power
Asset Turnover 1.09 1.10 1.05 1.13 1.09 1.10
Pretax ROA 15.5% 13.9% 13.7% 15.7% 13.4% 19.4%
ROE 32.6% 29.4% 28.6% 32.0% 30.6% 45.0%
Reinvestment Rate 12.5% 11.3% 11.3% 14.6% 11.4% 26.4%
Liquidity
Quick Ratio 0.47 0.49 0.54 0.60 0.62 0.53
Current Ratio 0.70 0.77 0.80 0.92 0.93 0.81
Times Interest Earned 14.1 13.5 11.7 1,103.3 841.1 842.6
Cash Cycle (Days) (33.8) (27.1) 0.4 10.8 28.2 (0.1)
Leverage
Assets/Equity 3.17 3.00 3.32 2.84 3.07 3.63
Debt/Equity 0.78 0.66 0.95 0.64 0.82 1.10
% LT Debt to Total Capital 28.4% 28.9% 27.6% 29.8% 34.3% 29.8%
Operating
A/R Turnover 12.0 12.7 14.1 14.2 11.7 10.4
Avg. A/R Days 30.6 28.9 25.9 25.9 31.3 35.1
Inv Turnover 7.0 6.8 6.3 6.6 6.2 5.5
Avg. Inventory Days 52.4 53.9 58.4 55.7 58.9 66.7
Avg. A/P Days 116.8 109.9 83.8 70.8 62.0 102.0
Fixed Asset Turnover 5.29 5.62 5.57 6.09 6.32 6.62
ROIC 18.3% 16.5% 16.1% 17.7% 15.6% 23.4%
Debt Profile & Free Cash Flow
• Closing net debt was €9.9 billion versus €8.5 billion as at 31 December 2013. The increase included the €0.9 billion cash outflow for purchasing the Leverhulme Estate shares.
• The cost of financing net borrowings in 2014 was €383 million versus €397 million in 2013.
• The average interest rate on borrowings was 3.5% and the average return on cash deposits was 3.8%.
• During the past 13 years, the highest interest coverage of Unilever PLC was 32.89. The lowest was 3.14. And the median was 9.57.
• During the year the following bonds matured and were repaid: (i) US $750 million 3.65%, (ii) Renminbi 300 million 1.15%, and (iii) £350 million 4.00%.
• Free cash flow of €3.1 billion after €0.8 billion of tax on disposal profits at the end of 2014.
• Total Debt/Equity 0.53 and Industry average: 0.58
• Current Ratio: 0.63
