EUR 850.00 For Business Accounts Only

Morningstar | Unilever Misses on Top Line but Margin Progression Is Encouraging; Limited Upside Remains. See Updated Analyst Note from 19 Jul 2018

Unilever narrowly missed our forecast due to a strong currency headwind in the first half of the year. Underlying trends were in line with our forecasts, but with second-quarter organic sales growth of just 1.9%, this is nothing to shout about, and is confirmation that the global consumer environment remains very challenging. We are not as bullish as we were on Unilever, following a rebound in the stock from its late-first-quarter lows, but we believe a modest amount of upside remains, and we think Unilever is charting the right course to deal with the challenges evident in its first-half results report. We reiterate our EUR 52 valuation and our wide moat rating.

Second-quarter underlying sales growth excluding spreads, which has now been sold to KKR, of 1.9% was a sequential slowdown from the 3.7% growth achieved in the first quarter, although around half a percentage point can be attributed to the truckers strike in Brazil, which lowered second-quarter sales by around EUR 150 million. In addition, Unilever outperformed in the first quarter, and a reversion to the industry means this quarter was not a surprise. A foreign exchange headwind of 8.9% in the first half was stronger than we expected, however, and although some of the currency pressure will ease in the third quarter, the company now looks unlikely to meet our full-year estimate of a 2.4% decline in reported revenue. Thus, we have lowered our forecast to a drop of 4% this year, which implies organic growth of 3% in the second half of the year. Our medium-term estimate of organic sales growth remains 4%.

A key tenet of our valuation is Unilever's margin expansion, and here the company provided an upside surprise with gross margin expansion of 80 basis points. We have nudged our margin assumptions throughout our forecast by 30-40 basis points, and our medium-term assumption of 19.7% is a touch below management's target of 20%.

The Asia/Africa, Middle East, and Turkey/Russia, Ukraine, and Belarus segment, or Asia/AMET/RUB, was Unilever's saving grace, with 6.3% underlying sales growth driven by volume growth. We think above-average growth is sustainable in both the near term, as India cycles the Goods and Services Tax implemented a year ago, and because of the secular growth drivers from Unilever's emerging-markets presence. The Americas segment was down 3.8%, but would have been only marginally negative without the Brazilian trucker strike, and we expect this to reverse to a large degree in the rest of the year.

On the other hand, we are disappointed with the negative 0.3% price/mix in the beauty and personal care business. This is indicative of the highly competitive and commoditized nature of the business, but we had hoped that Unilever's push into prestige beauty would have provided some support to pricing. Nevertheless, given a choice of volume or price-driven growth, we would probably take volume growth because this signals that a manufacturer is maintaining its shelf space, which is crucial to possessing an economic moat, and the near-2% volume growth in Unilever's personal care business is encouraging.