Hein Schumacher is hardly going to have to do much teasing to extract what Unilever’s shareholders want when he takes over as chief executive in July. Breaking the top line out of the funk it has been stuck in for the past decade is the clearest way to lift the FTSE 100 group’s market value.
True, underlying sales growth measured 9.2 per cent for the fourth quarter, ahead of what the market expected and far above the top-end of a target growth range of 3 per cent to 5 per cent. The big caveat? That all came from passing through rampant cost inflation to consumers via double-digit price increases on its vast stable of products, which range from Domestos bleach to Magnum ice cream. Sales volumes? They were down by 3.6 per cent over the final three months of last year and were 2.1 per cent lower over the whole of last year.
The price/volume balance should be less drastically skewed this year, according to Alan Jope, the pilloried chief executive who steps down this summer. The quantum of products sold in the first half will still be in negative territory and sales prices will be pushed higher, but Unilever has passed the peak of cost inflation, Jope believes, now guided at about €1.5 billion over the first half, below the €2 billion previously pencilled in.
The upshot? Volumes are expected to improve in the latter six months of this year, as price inflation cools. The group is shooting for underlying sales growth at “at least” the top end of its medium-term target range.
Delivering on that guidance should convince investors to stick around, but it won’t be enough alone to close the valuation gap between Unilever and its international rivals. At 17 times forward earnings, Unilever’s shares still trail the 20-plus valuation multiples attached to the likes of Nestlé, of Switzerland, and Procter & Gamble, of the United States.
The culprit? More sluggish top-line growth. Sales growth has come in towards the bottom of the 3 per cent to 5 per cent range over the past ten years. That is despite efforts to shift the sales mix further in favour of the higher-growth markets such as premium beauty and health and wellbeing.
Looking past the price rises that have accompanied double-digit inflation, there need to be stronger signs of volume growth to convince investors that Unilever deserves a higher market value.
How might former Heinz executive Schumacher stir the top line? A carving out of Unilever’s more mature foods businesses is one solution proffered by analysts at Jefferies, the broker. Listing the nutrition and ice cream operations as a separate entity could help to spur a higher market price for the faster-growth beauty, home and personal care businesses. Conspicuously, Schumacher has form in restructuring, including selling parts of Royal FrieslandCampina’s German consumer business, the company he heads up at the moment.
So, too, does Nelson Peltz, the activist American investor who last year gained a board seat after building a 1.5 per cent stake in the consumer goods group through his Trian Fund Management vehicle. He was instrumental in Cadbury Schweppes being sold to Kraft back in 2010. Hopes that the billionaire, celebrated by many an investor but feared in many a boardroom, can jolt the slumbering consumer goods group into better top-line momentum has sparked a rally in the shares over the past 12 months.
Speaking of Kraft, that calls to mind another dilemma facing the incoming boss. In fending off a bid from the American foods group back in 2017, Unilever pledged to aggressively boost its profit margin to 20 per cent — a target that since then has been scrapped. The price? What proved to be three of its weakest years of underlying sales growth. Investing in branding and marketing is vital in Unilever’s game. Does Schumacher accelerate spending here?
In any case, Unilever is ripe for more seismic changes.
ADVICE Hold
WHY Activist intervention and new leadership could unlock greater value from the shares
Redrow
Investors have been well prepared for a slowdown in sales from another big housebuilder. This time it was Redrow, the mid-cap player, that was unveiling a cut to revenue guidance for this year.
A sagging sales rate in the wake of September’s mini-budget means revenue is expected to be £2.05 billion, about £50 million shy of previous guidance. The sales rate has improved to 0.51 a week per outlet in the first five weeks of the year, from 0.38 over the final six months of last year, but whether it will be sustained is up for question. The upside? The slide in margins might be less severe than anticipated.
Hitting revenue guidance for this year looks secure, save for any big rise in cancellation rates. Revenue of just over £1 billion generated in the first half of the year, plus sales that are due to be completed before the end of the June, mean Redrow has already sold 97 per cent of the homes needed to make its sales target.
Prospects for the financial year to the end of June 2024 are more uncertain. Roughly £300 million of sales due for completion next year are in the housebuilder’s order book, which equates to 17 per cent of the revenue forecast by Peel Hunt,its house broker. Naturally, that is below where it was this time last year.
As for sales prices, the rate of growth has slowed to roughly 2 per cent in January versus the same time last year. But incentives offered to would-be buyers have increased, too, specifically in the form of deposit contributions, up to 5 per cent of the value of the property.
What does all that mean for the dividend? The company has stuck with a target to cover the cash return by three times earnings, which implies a fall in the dividend this year to 28p a share, based on Peel Hunt forecasts. At the present price, that would leave the shares offering a yield of 5.2 per cent. There are better dividends on offer from housebuilders with richer balance sheets, which are as cheaply valued.
ADVICE Avoid
WHY Uncertainty over prices is a drag on the shares
