Unilever: Fairly Priced, Little Upside

Stock Price: €21.8 ($29.87 USD)
Conclusion: Notwithstanding higher volumes, Unilever's (UL) adjusted EPS went down in 2009 (-7% in line with our estimates) for the third consecutive year. Western Europe continues to disappoint. We reiterate our view that the stock looks fairly priced and offer little upside based on our valuation range of €22-€23 per share.

F2009 results: Sales down 1.7% reported to €39,8bn, up 3.5% like for like (Q4 up 1.8%). EPS down 7% to €1.33 adjusted for one-off, down 33% reported. Guidance 2010: focus on volume growth, margin improvement and Cash flow.

Organic growth should not exceed 4% in 2010.

• Pricing further decreased in Q4 by 3.1%, notably in Americas and in Western Europe, reflecting heightened competitive activity. According to management, pricing should remain negative in H1 2010 and return to positive territory in H2.
• Volume growth should remain strong in emerging markets, but will be partly offset by subdued demand in Western Europe and North America. CEO Polman confirmed that 2010 might turn as difficult as 2009, due to rising unemployment, higher taxes and weak consumer confidence. Notwithstanding a sharp 3.6% decrease in pricing in Q4, sales in Western Europe fell 0.7% in volume. Adjusted for the number of trading days, sales were up between 1-2%, which is still not enough to drive organic growth.
• Structural weakness in spreads and in laundry where market conditions will remain challenging.

Margins outlook ? looking for a moderate gain following +20bp improvement in 2009.

• First, commodity costs should rise by 2+3% in 2010.
• Management is looking for a “significant increase” in marketing spending this year (up 80bp in 2009). We assumed +50bp in 2010. Western Europe, for instance, is clearly spending more than it used to in order to resume growth. As a result, margin went down 240bp last year to 14.4%. According to Polman, previous levels were not sustainable and largely responsible for the lackluster growth in Western Europe.
• Restructuring charges ($2.6bn spent since 2007) will exceed €400m in 2010, due to the cost related to the integration of the personal care business of Sara Lee. We expect restructuring charges to reach €600m.
• Unilever will benefit from further savings in 2010 (€1bn vs €1.4bn in 2009), partly derived from its restructuring programme. The programme initiated in 2007 is expected to achieve €1.5bn savings by the end of 2010 (€1.2bn to date).

Bottom line, EPS growth (+8% to €1.40) should benefit from two factors.

• positive swing in pension costs (-6% impact in 2009)
• neutral currency impact based on current forex rate (-2% impact last year)
• Last, Cash flow should continue to benefit from management focus on working capital reduction, albeit smaller than last year (€1.7bn working capital inflow).

We think that the stock is fairly priced, trading at 15.6xP/E and 10.4xEV/EBITDA. Our DCF based valuation points to €23 per share, confirming that the stock is fairly valued. We find Nestle (NSRGY.PK) cheaper at 9.5xEV/EBITDA.

Disclosure: No position