OPINION: Unilever a good hedge against market cycles, Newsline

By Frants Preis

JOHANNESBURG – Unilever is a British-Dutch consumer goods corporation. Its three divisions are beauty and personal care, food and refreshment, and home care. About 2.5 billion people use Unilever products each day in about 190 countries.

The company has more than 400 brands, and Unilever products can be found in nearly seven out of 10 households on the planet.

The company operates 310 factories in more than 70 countries.

Unilever’s most important brand is arguably Dove soap, the most popular soap brand in the US and the UK.

Its other brands are Lux, Lifebuoy, Axe, Vaseline, Sunlight, Domestos, Omo, Surf, Knorr, Lipton, Magnum, Ben & Jerry’s, Joko, Glen, Marmite and Robertson Spices.

Unilever invented fish fingers, built a village called Port Sunlight in Liverpool and aired the first television advertisement in the UK.

The global soap market is projected to grow by 11 percent a year over the next five years on account of increasing personal disposable income, rapid urbanisation, expanding populations, and increasing hygiene awareness due to Covid-19. As the largest producer of soap in the world, Unilever stands to benefit from this trend.

Sixty percent of Unilever’s revenue comes from its emerging markets business. It has a higher exposure to these markets compared with most other consumer-staple companies. Countries such as India and China have a growing middle-income population; a demographic likely to drive Unilever’s sales growth.

The spread of the pandemic has led to significant changes in consumer demand patterns. More time spent at home, and the critical importance of hygiene led Unilever to report resilient second-quarter results that beat expectations.

Cleaning and hygiene products saw the greatest double-digit increases in growth, while the food and personal care segments experienced slight declines. The sale of liquid hand wash grew 155 percent, and sanitiser sales grew more than 20 000 percent.

Parts of the business that have been negatively affected by the crisis, such as away-from-home purchases and certain beauty products, should recover as the crisis fades and lockdown regulations ease.

Accelerated growth in the higher-margin personal care and home care segments should enable Unilever to improve its profit margin. It is also encouraging that Unilever is addressing operational issues that led to market share-loss during 2019.

Unilever trades at a reasonable 20 times earnings, with a dividend yield of 3.2 percent. Its current valuation discount to its peers is at its widest in a decade. Its recent market-share decline is likely temporary, and insufficient credit is attributed to Unilever’s defensive profile and dominant presence in emerging markets.

It has a portfolio of leading brands, relentless focus on cost-cutting and a solid balance sheet. Robust cash flows enable ongoing investments in its brands and in innovation, spurring on long-term growth. Unilever is a fine addition for investors who want to hedge against market cyclicality.

Frants Preis, CFA, is a portfolio manager at Vega Asset Management.

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