Quarter in, quarter out, Unilever grinds out perfectly acceptable numbers, with growth in most key markets, useful acquisitions and generally improving margins — and Paul Polman, the Eeyore-ish chief executive, tells us things are getting worse. The two are not mutually incompatible.
Mr Polman was warning again yesterday of no signs of an improvement in the world economy, and the uncertainties have obviously grown, given Brexit, Turkey and the US elections. Unilever also had some headwinds from currency movements because it reports in euros and gets revenues from countries such as Brazil, Argentina, Venezuela, India and Spain that have seen rapid depreciation against the European currency.
In underlying terms, sales were up by 4.7 per cent in the first six months, consisting about half-and-half of volume and pricing growth. Various acquisitions chipped in another 0.7 per cent, while those negative currency movements took off 7.6 per cent. All this nets out to a 2.6 per cent fall in actual reported sales.
The good news is that the foreign exchange hit will decrease in the second half because some of those currencies have stabilised. On an underlying basis, sales were up across all four product categories, and by an encouraging 8 per cent in emerging markets.
Unilever is taking action to improve several underperformers in its portfolio, such as ice creams and spreads such as Flora, where the market is in decline. It has probably tried to sell the latter but is now making the best of it. It is successfully combating price deflation in Europe by increasing volumes.
The long-term drivers are still there: the move towards more upmarket personal products in emerging markets and the ability to find new ranges derived from its existing brands such as Omo, Cif and various ice creams and desserts.
The shares in London shot ahead after the Brexit vote, but this was down to the falling pound making dividends paid in sterling more attractive, and the yield is still about 3 per cent. Unilever is undeniably a safe haven, but the harbour fees are high. The shares, off 41p at £35.34, sell on about 22 times earnings. Safe for the long term, then.
MY ADVICE Hold
WHY The company has strong positions in its markets globally and plenty of scope to grow revenues at 4 per cent a year, but shares are pricey
Premier Foods
While the company does not actually make the stuff, there is a strong element of “jam tomorrow” at Premier Foods. The company opposed a 65p a share offer from McCormick this year; the shares were up by ¼p to 46¾p on the back of a first quarter trading statement that at least referred to sales comfortably outpacing price deflation in the food sector.
This is running at about 3 per cent, though inflation will probably come back as the effect of the weaker pound kicks in. Premier’s sales rose by 1.9 per cent in the three months to July 2. McCormick walked away from the deal because Premier preferred a link with Nissin Foods of Japan, which took a stake, and there is talk of the Japanese selling some of their products through Premier’s distribution channels and helping it sell products such as Mr Kipling cakes abroad, though not until next financial year
Premier shares are hard to value in a normal way because of the drag from the debt and pension fund. Take these out and they probably sell on the same multiple as comparable businesses, but in the absence of any return to the dividend list it looks too soon to buy.
MY ADVICE Avoid
WHY The recovery has a lot further to go at Premier
Close Brothers
Close Brothers actually went to the trouble of taking out ads reassuring its small business customers and others that in the wake of the referendum it was business as usual and the bank was open for lending. The banking side is where it is today because of the last financial crisis, when it continued to lend to SMEs when other bigger banks would not. This allowed a rapid growth of the loan book, so it has shown an ability to navigate through difficult times.
So far, except for a bit of caution on the part of people wanting car loans, there has been little obvious downturn since the vote. Previous transactions are not being cancelled, including on the property side where Close funds housebuilding. This would seem to track the experience of the other builders. For the five months to the end of June, the loan book was up 7.2 per cent, though clearly this predated the vote.
Winterflood Securities has done predictably well from the mayhem in the market as investors in equities either stampeded for the exits or saw obvious mispricings in the market and bought. Close continues to build its asset management side slowly, with net inflows and positive market movements.
The shares were off by 27 per cent at one stage, as the market over-reacted and Close was lumped together with other specialist lenders with significantly less experience. The shares have recovered since and added 45p to £12.32 yesterday. They sell on ten times earnings for the year about to complete, which still looks too low.
MY ADVICE Buy
WHY The shares are off too far in the retreat by financials
And finally...
Another specialist financial business that seems to have been marked back too far is Intermediate Capital Group. The company says there is no obvious reason why Brexit should require significant change. It is well diversified and has long-established businesses in Europe. The only possible downside is if a period of uncertainty in the UK slows corporate deals and makes it difficult to achieve exits on investments. Given a relative return to stability on the markets, this does not look an immediate threat.
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