US Edition Unilever
£17.94 -35p
Questor says BUY
It constantly seemed to be missing forecasts and reducing expectations – and investors, quite rightly, started to shun the shares. But finally, after years of being the black sheep of the consumer products family, Unilever is starting to deliver on its strategy.
The group's third-quarter numbers beat expectations, with growth in all of its regions and all of its categories. Management do not expect growth to stop here either – Jim Lawrence, the group's chief financial officer, said that he sees nothing slowing down the underlying momentum. However, because of fears of lower pricing in the fourth quarter, the shares fell after Thursday's announcement. Questor would regard this as a buying opportunity.
In the three months to September 30, sales growth hit 3.4pc, driven by a 3.6pc rise in volumes. Despite the fact that the company increased its advertising and promotion spending, margins also managed to increase by 70 basis points.
Costs should continue to provide a nice headwind for some time. Mr Lawrence expects that the price of raw materials will fall by about €500m (£448m) in the second half of the year. This fall is expected to continue in the first six months of 2010, before rising in the second half.
Of course, markets are still challenging, particularly in Western Europe. However, like-for-like sales were broadly flat in the region, which should be regarded as a good performance. However, Questor believes the main reason to own the shares is Unilever's emerging market exposure. Developing nations now make up more than half of group sales – and this should increase over time. Volumes in the key Asian, African, Central and Eastern Europe markets rose 4.4pc and sales increased 5.7pc.
Growth was partly achieved by price cuts, as there has been a trend for consumers to downgrade to cheaper, unbranded goods as the recession deepened. This should not be a surprise to anyone.
Another good reason to own the shares is the dividend, as the shares are yielding a respectable 4pc. The interim payment of 24.22p will be made in December and the shares go ex-dividend on November 18. Note that, as of 2010, the company will move to a more sensible quarterly payment schedule.
The fact that the company has ruled out a counter bid for confectionery group Cadbury is also good news. When the strategy is starting to make progress why would the group risk upsetting the apple cart? Unilever is still working through the integration of the personal-care assets purchased from US group Sara Lee, which includes the Radox brand amongst others.
The shares are trading on a December 2009 earnings multiple of 15.5 times, although consensus expectations could move higher after this announcement, so the multiple may move lower. It falls to 13.8 next year, based on current forecasts. Unilever shares were first recommended on November 25 last year at £15.03 and are 19pc ahead of the initial recommendation. The stance remains buy.
Vedanta Resources
£22.42 -48p
Questor says HOLD
Global population growth driven by emerging markets will underpin demand for materials such as copper, aluminium and zinc well into the future. Constraints on the supply side for these commodities are likely to be exacerbated by the current financial crisis, as companies have focused on reducing debt rather than investing for growth.
This is why the mining sector offers some great opportunities for investors.
Many miners have been unable to invest in bringing new capacity on stream – but Vedanta is not one of them.
The Indian-focused group managed to escape the debt problems which are plaguing other players in the sector. This means it has continued to invest throughout the downturn. This should, in turn, have a positive effect on its future growth profile.
Capital expenditure in the first half was $1.79bn (£1.1bn) and chairman Anil Agarwal said he expected this would be the peak year for investment in the current organic growth programme. Vedanta aims to triple its iron ore output by 2013 and increase aluminium production fivefold.
Yesterday's interim numbers were roughly in line with expectations, with earnings per share in the first half of the year down 44pc on weaker metals prices. Revenues fell by a quarter to $3bn. The balance sheet remains strong, with net debt of $969m and cash, cash equivalents and liquid investments of $6bn.
The shares are trading on a December 2009 earnings multiple of 19.4, but this falls to 9.9 next year. However, the dividend yield at 1.1pc is unimpressive.
Positively, the company also said it would not have to raise provisions for an alleged fraud investigation at its iron ore unit, as any problems occurred before the company purchased the unit.
The shares have had a phenomenal run since they were recommended on December 4 last year at 543p, adding 313pc. However, despite the fact that Mr Agarwal said yesterday that the company had seen improvements in the global economy, Questor still feels the valuation looks pretty full right now. Hold.