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Soft soap 

21 January 2014 By Robert Cole

Emerging-market uncertainties are washing off Unilever. Currencies are working against it: groupwide earnings were knocked by 7 percent thanks to exchange-rate swings across the globe. But forex aside, the trends in developing economies remain firmly positive. The declines in developed markets’ revenues and profits are more worrying.

Doubts about Unilever’s position in emerging markets led the share price down 13 percent since July last year, while the pan-European STOXX 600 index has gained almost exactly the same amount in the same period.

But investors seem to have overdone their concerns. While the growth rate is slowing – emerging-market revenue increased at a double-digit rate in 2012 and 8.7 percent last year, ex-forex – it is still strong. Unilever stock duly clawed back a chunk of the underperformance on Jan. 21.

Nearly 60 percent of the company’s business is now in emerging markets, with the sales and profit split being similar. Overall, Unilever managed to widen what it calls core operating margins by 40 basis points. But underlying sales and profit in developed European and North American margins fell by around 1 percent. The fourth-quarter trends are also discouraging.

Unilever has many operational and financial strengths. In an industry where brands breed winners, it is impressive to note that the Dove soap and Knorr stock cubes company now has 15 product lines generating more than 1 billion euros of turnover per year. Unilever’s capital expenditure ran at the equivalent of 4.1 percent of turnover last year and the company says it will continue to invest between 4 and 4.5 percent for the foreseeable future.

The investments bear profitable fruit. At 14 percent, operating profit margins are getting on for twice the industrial median as listed by Thomson Reuters Eikon. Unilever is cash-generative and has a healthy balance sheet: net debt is about the same as annual EBITDA.

The shares trade at the equivalent of 19 times Eikon estimates of consensus forward earnings. That is in line with the sector and at a 25 percent premium to the STOXX 600. Against the headwinds, it is far from cheap.


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