Transferring Coverage of Unilever

We are transferring coverage of Unilever ULVR with a EUR 50 per-share fair value estimate (GBX 4,430 for London-traded shares and $55 per ADR). We maintain Unilever’s wide moat and stable moat trend ratings.

We think Unilever has a wide economic moat derived from its entrenchment in the supply chains of retailers (an intangible asset), brand power in certain categories, and cost advantage. We view the company’s relationships with retailers as an essential part of its wide moat. Our analysis suggests that the nutrition, ice-cream, personal-care, and homecare segments (about 75% of group sales) exhibit signs of a wide economic moat based on the company’s strong entrenched position in supply chains, built over decades of operating in these markets. Our analysis of pricing trends in recent years suggests that Unilever has been successful at passing on pricing in line with inflation trends. Although some of the group’s brands may exhibit moatworthy pricing power due to the existence of brand equity in categories with low or even positive sensitivities to pricing, we believe these tend to be diluted at the group level. We find traits of brand power (an intangible asset) in certain categories within homecare, personal care, and beauty and well-being. Unilever exhibits healthy cost advantages at the group level. The company is an efficient executor, with a relatively high direct operating margin, ranking in the top half among our homecare and personal-care coverage.

Although Unilever exhibited leading top-line performance during the coronavirus pandemic, the primary factor behind this success was pricing in response to cost inflation and low demand elasticity in its key categories. Although we anticipate pricing to remain a significant driver of top-line growth in 2023, its impact should diminish in subsequent years. As the firm shifts focus toward volume growth and mix, we expect organic growth to decelerate to slightly below 4% by the end of our explicit forecast period.