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Unilever

Report

Marks Zujevs

2017

Southampton Solent University

Contents

Executive summary 3

Purpose and layout of report 4

Overview of market environment4

Analysis5

   Revenue5

   Business structure6

   Net income / Profit margin7

   Current ratio8

   Debt to equity ratio8

   Cash flow9

   EPS & Price earnings10

   Z-Score model11

   Conclusion11

Sources12

Unilever

Unilever is a British transnational consumer goods company headquartered in London, United Kingdom. Its products include food, beverages, cleaning agents and personal care products. It is the world's largest consumer goods company measured by 2012 revenue. 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. (Grad Connection, 2017, A).

According to Unilever official website, they have products of more than 400 worldwide famous brands. “Seven out of every ten households around the world contain at least one Unilever product, and our range of world-leading, household-name brands includes Lipton, Knorr, Dove, Axe, Hellmann's and Omo.” (Polman and CEO, 2017)

It is said that the company was established on 2 September 1929 by Lever Brothers and Margarine Unie signing an agreement. (Unilever, 2017, A). Since 1929 company grew significantly and became one of the largest companies in the world with €52.713 billion revenue (2016) and €555.184 billion net income (2016). (Unilever, 2017, B.)

The main competitor of Unilever is an American consumer goods corporation named The Procter & Gamble Company with US$65.29 billion revenue (2016) and US$10.50 billion net income (2016). It primarily specialises in a wide range of cleaning agents, personal care and hygienics products, however, after the sale of Pringles their portfolio don't include foods, beverages and snacks. Most famous their brands are Always, Ariel, Braun, Gillette, Pampers, Tampax, Tide. (Grad Connection, 2017, B.)  

According to (Hoovers, 2017) Unilever is also competing with a Swiss transnational food and drink company Nestlé S.A. with over 8000 brands, producing coffee, bottled water, milkshakes and other beverages, breakfast cereals, infant foods, performance and healthcare nutrition, seasonings, soups and sauces, frozen and refrigerated foods, and pet food. The third competitor is a British multinational consumer goods company Reckitt Benckiser. Their brands include Dettol, Strepsils, Veet, Air Wick, Calgon, Clearasil, Cillit Bang, Durex, Lysol, Mycil and Vanish.

Purpose and layout of report

In this report there is provided information about the Unilever's structure, financial position and results of operations to give investors a clear understanding of how the Unilever's management is running the business and what could be possible future results.

Overview of market environment

Unilever operates in the fast-moving consumer goods (FMCG) industry, one of the largest and most competitive industrial sectors in the world.  (Unilever, 2017, C.)

FMCG market is facing very intense competition globally and locally. There is a non-stop chase of cost reduction to find financing for future reinvestment in terms of long-term growth. Due to Brexit and US president elections market has faced uncertainty and volatility, however, Unilever is able to adapt to new conditions. A new generation of companies has also entered the market with their direct approach to growth segments, such as Millennials using all the common attributes, targeting and selling through digital sources. Not to mention, Unilever is adapting to the new environment, for example by introducing new vegan product variants by Ben & Jerry's and Hellmann's. One of the main environmental challenges is deforestation and harmful emissions. Governments are making requirements stricter year to year.

In spite of this challenges, this market has a great potential. That said, research shows that by 2025 Millennials (18-34-year-olds) will number around 2.3 billion people, representing the largest population cohort globally. Their spending power will have risen

to €1.7 trillion, €570 billion of which will be for non-essential expenditure. (Unilever, 2017, C.)  Moreover, with a growth of emerging markets, that makes 70% of Unilever volume, there are some bright spots in the future.

Analysis

Revenue

In last 5 years Unilever's revenue was around 50 billion EUR per year. During the last year when lots of FMCG manufacturers had a significant decrease in revenue, caused by volatile political and economic situation with fluctuating currency rates, they had only 1% decrease. This number was achieved by competent decisions of the board. With their strategy to develop in emerging markets and recovering developed countries next years should be with a positive trend growing from 55.6 Billion USD to 59.3 Billion USD. Especially, Unilever is now trying to make eco-friendly products, that became a significant factor while choosing a product to buy. (CNN, 2017, A.)

P&G had a decrease in sales due to the economical situation as well and divestment process, in September they sold 41 beauty brand to competitor Coty. Their sales are expected to decrease from 65.3 Billion USD to 65.1 Billion USD. (Zacks Investment Research, 2017)

Business structure

(Unilever, 2017, C.)

Unilever's core business is connected with personal care. It benefited from innovations and extending into more premium brands through acquisitions. This market is going to grow from 81.8$ billion (2016) in Europe to 86.5$ billion (2020) and Unilever has an ability to take a big part of it. (Statista, 2017, A.)

The second largest part of the business is producing food. During last year it decreased by 3.1%, however, Unilever put an ambitious goal to double their portfolio by 2020. In 2016 European market had sales of 647.4$ billion and it is expecting a growth to 692.2$ billion in 2020. (Statista, 2017, B.)

Turnover for Home Care declined by 1.5% which includes an adverse currency impact of 6.5%. (Unilever, 2017, C.) There were a few factors that helped to improve the situation as the launch of Surf Sensations, Omo with the new improved formulation and Comfort Intense, Domestos toilet blocks were launched on new markets. In home and laundry care market amounts to 30.7$ billion (2016) and it is expected to be 32.6$ billion in 2020. (Statista, 2017, C.)

Refreshment turnover declined by 1.1% including a 4.6% adverse impact from currency and a 0.1% positive contribution from acquisitions and disposals. (Unilever, 2017, C.) Main improvements were made by the growth of tea in premium segment and innovations in ice cream production.

Net income / Profit margin

 

Operating profit margin (%) = Operating profit x 100 / Sales revenue

Even though there was a decrease in revenue, Unilever's net income has increased. That is a result of increased prices with overall cost reduction policy. For instance, by decreased fuel consumption in logistics, collecting rainwater, using new technologies to increase efficiency and reduce costs, waste and emissions. However, it is seen that Procter & Gamble margin is still higher due to placing emphasis on driving value creation and cash. At the same time deprioritizing unprofitable lines of business.

Operating (OCC) cycle (days)

Operating (OCC) cycle (days) = Inventory turnover + Receivables collection period – payables payment period

Cash is vitally important for a company. A cash conversion cycle shows how well a company's working capital is being used and negative results are more desired. It means that a company don't pay for their inventory or materials until they have sold the product.

There is seen a similar trend within two companies between 2012 and 2015, when P&G had paid faster than Unilever, and year by year companies postponed their payment terms. The thing changed in 2016 when Unilever started working with more than 100 start-ups and they needed completely different approach. Start-ups are not able to wait for the payments for 3 months and Unilever shortened the payment terms to make sure it was more acceptable for them. Moreover, these companies are struggling to pay so fast, that's why receivables period increased. Unilever worked with legal to make their collaboration easier and in long term, their OCC is going to decrease, however by now with their search for innovations ratio with 0 days is still more than acceptable.

Current ratio

Current ratio = Current assets / Current liabilities

Unilever's current ratio has slightly decreased during last 5 years and is 0.68 at 2016. Even though a current ratio below 1 shows that the company is not in a good financial health it doesn't mean it will go bankrupt. There are many ways how to find financing except using own capital, moreover, using borrowed capital you can get much higher growth potential. However, it should be kept closer to 1 not to get in trouble in case of some unexpected situations. Their competitor P&G current ratio has radically increased during last 4 years, that could mean that they are not using current assets, working capital efficiently.

Debt to equity ratio

Unilever's debt to equity ratio is 2.32. That means that company is using leveraging to have a higher growth rate and generate more earnings. It is safely to do when the business is stable and profitable, that is completely right in our situation. For capital-intensive industries, such as manufacturing it is a normal practice to have a debt/equity ratio around 2. However, it is still riskier and could instil mistrust in an ability to repay the loan. Procter & Gamble has a debt/equity ratio 1.22 that means that the company has taken on relatively small debt, has low risk and not expecting radically increasing revenues.

Cash flow

Cash and cash equivalents at the end of the year (millions).  2016   2015   2014

Unilever      3,198  2,128  1,910

Procter & Gamble     7,102  6,836  8,548

Positive cash flow shows that a company's liquid assets are increasing, giving an opportunity to settle debts, reinvest or/and return money to shareholders, make reserves against future financial challenges. Unilever has not sold out Long Term Assets during last few years, that could influence cash flow increase, however, they have increased liabilities, that influenced on the upward trend. The company should have enough cash on hand to settle short-term liabilities, otherwise, it could not survive a downturn in its business or a lawsuit. Unilever's cash to current liability rate is around 15%, but Procter & Gamble rate close to 43%.

EPS & Price earnings

Price earnings = Market value per share / Earnings per share

Unilever's EPS in 2016 was 1.83 EUR with price earnings 1:21.4. Procter & Gamble meanwhile had 3.42 EUR with price earnings 1:23. According to analyst forecast, they are expecting Unilever's EPS from 1.98 USD to 2.19 USD. Price earnings are likely to grow from 21.4 to 22.14 (8.4%). Group prospective dividend yield is 3.6%. This payout is easily covered by earnings and free cash flow, making it enough safe. (CNN, 2017, A.)

According to Zacks Investment Research, P&G's EPS will rise from 3.80USD to 3.86USD and Price earnings are expected to rise from 22.1 to 23.57 (5.11%). There is not likely to happen a significant growth, because of currency headwinds, however, due to their divestment process and their focus on growing only those brands that will lead to renewed long-term profit growth there is still going to be 1-2% growth. That means P&G so far is a good investment if you are not expecting mind blowing profits and just want to save your money with a 3.1% yield at the current stock price. (Zacks Investment Research, 2017)

Z-Score model

Unilever z-score is 3,742.

Procter & Gamble z-score is 4,125.

According to Altman z-score, that is a control measure for the financial distress status of enterprises, companies with scores above 3 are not likely to go bankrupt. This ratio was found to be 72% accurate in predicting bankruptcy before 2 years and 80-90% one year before the event. Hence, both companies are not in a risky position during the next few years. That means that investors may think about purchasing these companies stocks

Conclusion

7 of 14 reliable brokers buy Unilever's shares, 6 keeps and only 1 sells. (HL, 2017)

9 of 23 polled investment analytics recommend buying P&G shares, 12 to keep and only 2 to sell.  (CNN, 2017, B.)

Unilever and Procter & Gamble are very stable developing companies. Both of them are on a low risk to go bankrupt or to have a dramatic decrease in sales/profit. Unilever's growth strategy is a bit more ambitious than P&G's and hence there is expected dividend yield of 3.6% comparing to 3.1% (P&G). Unilever has a goal to grow in emerging market that will raise awareness and their market share, P&G at the same time are more concentrated on reducing Cost of Goods Sold, overheads and working on marketing efficiency (PG Investor, 2017).

Personally, I would recommend to buy Unilever's shares, because of their clear future vision, concrete achievable goals and a higher rate of return. They are looking for new opportunities, actively collaborate with start-ups. According to the latest news, Unilever is implementing many effective things, such as putting their brand name on the products packages that increase engagement, working with start-ups got them an opportunity to decrease marketing costs and scale up.

P&G strategy could be compared with the appearance of a bear, powerful, but hulking. In the century of technology, innovations and overall introduction of completely new products it is vitally important to be progressive and adaptable.

Sources

CNN (2017) A. UL - Unilever Forecast, Available at: http://money.cnn.com/quote/forecast/forecast.html?symb=UL (Accessed: 23th March 2017).

CNN (2017) B. PG - Procter & Gamble Forecast, Available at: http://money.cnn.com/quote/forecast/forecast.html?symb=PG (Accessed: 23th March 2017).

Grad Connection (2017) A. About Unilever, Available at: https://au.gradconnection.com/employers/unilever/about-unilever/ (Accessed: 27th March 2017).

Grad Connection (2017) B. About Procter & Gamble, Available at: https://au.gradconnection.com/employers/pg/about-pg/ (Accessed: 27th March 2017).

HL (2017) Unilever plc (ULVR) Broker Forecasts, Available at: http://www.hl.co.uk/shares/shares-search-results/u/unilever-plc-ordinary-3.11p/broker-forecasts (Accessed: 23rd March 2017).

Hoovers (2017) Top Competitors for Unilever. [ONLINE] Available at: http://www.hoovers.com/company-information/cs/competition.unilever.f5614c5e74535482.html. (Accessed 7 March 2017).

PG Investor (2017) Company Strategy, Available at: http://www.pginvestor.com/Company-Strategy/Index?KeyGenPage=208821 (Accessed: 23rd March 2017).

Polman, P. and CEO, U. (2017) About Unilever. Available at: https://www.unilever.co.uk/about/who-we-are/introduction-to-unilever/ (Accessed: 5 March 2017).

Statista (2017) A. Cosmetics and Personal Care, Available at: https://www.statista.com/outlook/70000000/102/cosmetics-and-personal-care/europe# (Accessed: 28th March 2017).

Statista (2017) B. Food, Available at: https://www.statista.com/outlook/40000000/102/food/europe# (Accessed: 28th March 2017).

Statista (2017) C. Home and laundry care, Available at: https://www.statista.com/outlook/60000000/102/home-and-laundry-care/europe#market-revenue (Accessed: 28th March 2017).

Unilever (2017) A. Our history 1920 - 1929. Available at: https://www.unilever.com/about/who-we-are/our-history/1920-1929.html (Accessed: 5 March 2017).

Unilever (2017) B. Full-year & fourth quarter results. Available at: https://www.unilever.com/investor-relations/results-and-publications/latest-results/ (Accessed: 5 March 2017).

Unilever (2017) C. The Unilever Annual Report and Accounts 2016, Available at: https://www.unilever.com/Images/unilever-annual-report-and-accounts-2016_tcm244-498880_en.pdf (Accessed: 19th March 2017).

Zacks Investment Research (2017) P&G earnings forecast, Available at: http://www.nasdaq.com/symbol/pg/earnings-forecast (Accessed: 23rd March 2017).

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