Unilever PLC Update
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The collective noun for analysts is a consensus. Few other professions can find such virtues in group thinking.
Take Unilever. As an investment, the group was dead money since the arrival of Alan Jope as CEO in 2019, and for almost two years in advance. Investor confidence was weakened by Jope’s penchant for talking about purpose rather than profit, coupled with a bad cross-linking warning within his first year. Yet twice as many sales analysts as the manufacturer of Marmite and Dove soap are still a buy value, as always.
The underperformance of the Unilever pandemic has made the fan club’s life increasingly uncomfortable. Only one of the 14 brokers that follow Refinitiv maintained a ‘sell’ rating through the early 2020 market, of which Unilever rose by only 7 percent. This can be compared to a 36 percent recovery for the FTSE 100, of which Unilever is the third largest component. It also lags far behind competitors such as Nestlé (27% higher) and Procter & Gamble (42% higher).
In response, some analysts are calling for a higher power. Quite a few recent notes identify investor activism as the fastest way to save Unilever from a two-decade low compared to its peers.
The prayer is for a lightning bolt similar to that of Kraft Heinz hostile bid in 2017, which briefly focused the thoughts of Jope’s predecessor Paul Polman on shareholders rather than stakeholders. Activism is a matter of when, if not, Exane BNP Paribas told customers this week, because Unilever is ‘too good an asset to scramble’.
At the heart of the recent speculation is the group’s India subsidiary Hindustan Unilever. Its majority stake in the £ 64bn division accounts for almost half of Unilever’s market value, up from a fifth a decade ago.
Hindustan is quoted separately, as are the Indonesian and Nigerian subsidiaries, so investors have a clear measure of how valuations differ between developed and emerging markets: Barclays estimates that the sum-of-the-parts group discount increased by 13 percent at the time of Kraft’s bid up to 25 percent.
Unilever’s traditional decomposition theory involves separating food from soap, which would require nearly two decades of work to integrate supply chains and offices. Dividing geographically can be less disruptive because management is already so arranged. Exane estimates that if both sides of the group are valued in line with peers, even if it allows for some extra operating costs, the share would be worth almost double the current value of £ 78.10.
Separation alone, however, will do little. Investors should also regain confidence in a developed global industry that generated more than 40 percent of revenue last year, but is valued at less than zero by some measures. Jope should take at least some of the blame, having taken the lead twice this year in addition to the 2019 warning, but consensus predictions have barely faltered. Unilever’s weak share price reflects an operating performance that was no worse than its peer average; measured by market share, it could be even better.
Can an activist try to remove Jope? Dismissing a sacked CEO would be extremely aggressive, especially for a mainstream fund that could raise £ 3bn or needed to raise leverage. It would also be a long shot: no board wants to eliminate an ESG champion so soon after his appointment, solely on the basis of outside pressure.
Activists tend to favor easy victories. Elliott’s public campaign against GlaxoSmithKline and Third Point’s tilt at Prudential suggested nothing beyond the council’s previous thinking. An attack on Unilever has more in common with ValueAct’s long and fruitless involvement with Rolls-Royce, whose ongoing restructuring has made its efforts a blancmange.
Unilever’s recent problems have largely revolved around the presentation. An unpopular CEO and an iron transformation program give activists the opportunity to create some news headlines, but the real change will test any conventional investment horizon. For now, expectations of an outbreak seem like wishful thinking.