Unilever: Volumes Disappoint but Core Categories Perform Well

Unilever’s ULVR third-quarter trading update showed sales growth at 5.2%, in line with company-compiled consensus of 5.2%. Although the headline growth number came in as expected, the driver was pricing, which was up 5.8% (versus 5.1% for consensus), with volumes being down 0.6% versus expectations for up 0.1%. Since volume growth, which is more maintainable long-term and contributes to durable margin improvement—admittedly a higher-quality growth driver than pricing (merely passing on input cost inflation—came in lower than expectations, the share price reaction this morning was somewhat negative, down about 3% at the time of writing. That said, management maintained fiscal 2023 organic growth guidance to higher than 5% versus 7.1% for consensus (prerelease), and 6.7% (unchanged) in our model. On profitability, Unilever continues to expect a modest improvement for the full year (up 37 basis points in our model, in line with company-compiled consensus). Net material inflation for 2023 is expected at about EUR 2 billion, of which EUR 0.4 billion in the second half, implying a significantly lower need for price rises in the second half (up about 3.5% in our model).

All in all, a mixed third quarter with volumes declining sequentially (negative 0.6% versus negative 0.3% and negative 0.2% in the second and first quarter, respectively) despite lighter pricing (5.8% in the third quarter versus 8.2% and 10.7% in the second and first quarters respectively). On a more positive note, core categories are performing well, while the action plan that the new CEO announced is in the right direction. Given the in-line growth number and guidance for the full year, our fair value estimate for Unilever is unchanged at EUR 52/USD 56/GBX 4,560, with minor adjustments for currency movements. Shares are undervalued.