Alexander Belikov
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Alexander Belikov in J.T. Marlin,

Unilever (UL) – a strong company without strong opportunities.

Our opinion: small downside potential
Street’s opinion: small upside potential
Current price – 42.75 USD
Target price – 40.20 USD

With Unilever being one of the leaders in Food Production, the company experienced a decline in volumes sold in developed countries (with the 14Q4 first overall volume decline in more than 5 years). The company heavily depends on emerging markets for the growth but the current situation is concerning, especially in markets like Russia and other countries in Eastern Europe. We fail to find any potential for further growth in the following years but think the current valuation with the company trading near its highest historical levels does not give any abnormal opportunities with the given fundamentals.

While the strong dollar may help within the core markets, especially in the US, the effect is heavily offset by the currencies devaluation (against the said US dollar and other major currencies) in other countries, on which Unilever depends if it tries to find any growth opportunities. Although we believe the strong dollar is marginally better for the company, we highlight it to be a double-edged sword. With the concerning discussion on monetary policy within Europe and USA, we find Unilever to be in a beneficiary position as the company can certainly provide stability due to a high diversification of the business but we also do not see any positive risks here.

We estimate the current forward dividend yield to be at around 3% and highlight it not to be a very lucrative number. With the dividend policy being highly predictable and payout rate stable at around 60% percent levels, we see no potential for the dividend increase in the near future. The company's ROIC does not show any tendencies to significantly decrease and we see it at c.20% in 5 years compared to the cost of capital at 8%, so the current dividend policy with giving a significant part of the cash flow to the shareholders and investing the rest seems reasonable to us.

Looking at the forward multiples, the company trades at P/E of 23 and EV/EBITDA of 15. We compare these multiples to 3-year historical levels and find them to be in the upper parts of the ranges - our estimation of P/E range is [16.00, 23.50] and EV/EBITDA is [10.50, 16.00]. While it does not necessarily mean an expected decline in the price, it hints the shares are already priced high compared to the past.

To give perspective on the risks to the business, we again remind of the importance of emerging markets for the growth. If there will be an improvement in the situations in Russia or other CIS and Asia countries, Unilever will find ways to profit from it, so if you are a believer in the scenario of fast recovery (of which we are not) you may find the market valuation of Unilever to be fair.

Overall, we do not feel like there is much of a downside potential to the price of Unilever but we believe the share price to go down in the short-term as much as 5-7%, so we would recommend underweighting Unilever and expect more lucrative entry points for investments.