- Underlying earnings per share down 2 per cent.
- Free cash flow down to €2.4 billion, compared to €2.9 billion in the first half of 2020.
Unilever (ULVR) has a tricky inflation tight rope to walk over the next year. Increases in raw material, packaging and distribution costs have contributed to a drop in underlying operating margin by 100 basis points to 18.8 per cent compared to the first half of last year. With inflation unlikely to disappear overnight, it now needs to work out how much of the price increases it can pass on to consumers while still maintaining positive sales volume growth. It’s going to be a big test of its customers’ brand loyalty, traditionally a major strength of the group.
The good news is that there is room for price increases. Underlying sales growth was up 5.4 per cent, with 4 per cent driven by volume and just 1.3 per cent driven by price. UK and US inflation and wages rose much faster in same period which should give Unilever some headroom to raise prices. It may take time for them to filter through which is why management has revised its margin down to flat for the year but it will happen eventually. Slowing volume growth would have been much more concerning as it is a tougher trend to reverse.
Another reason for the drop in operating margin is that Unilever has increased marketing spend across all its product sectors and geographies. This seems sensible as it is easier to increase prices on stronger brands without losing customers. This increase does come against weak comparators in H1 last year where Unilever slashed marketing spend but it is a step in the right direction. Marketing is a historical strength and this money is unlikely to be wasted.
The big concern is how much and how quickly consumer spending is going to bounce back. A recent research note from Deutsche Bank says that consumers aren’t expecting to spend more in the coming months and that in Europe retail sales have been volatile without any big upward surges. On top of this, emerging markets which made up 30 per cent of H1 sales have better vaccination rates and are seeing spikes in Covid-19 cases. The company noted that “market conditions in South East Asia remain challenging” and highlighted Indonesia re-entering lockdown as a reason its negative sales growth.
It should be able to pass on price rises to its customers but it won’t be immediate and Covid-19 will be a disruptive force for some time to come. Hold.
Last IC view: Buy, 4,246p, 05 May 2021
|ORD PRICE:||4,066p||MARKET VALUE:||£110bn|
|TOUCH:||4,065-4,067p||12-MONTH HIGH:||4,944p||LOW: 3,721p|
|DIVIDEND YIELD:||3.7%||PE RATIO:||23|
|NET ASSET VALUE:||648¢||NET DEBT:||120%|
|Half-year to 30 Jun||Revenue (€bn)||Pre-tax profit (€bn)||Earnings per share (¢)||Dividend per share (p)*|
|£1 = €1.17. Includes intangible assets of €35bn, or 1,344¢ a share. NB: Dividends based on two quarterly payments of €0.4268 then converted to sterling.|