Unilever PLC (LON:ULVR) has been downgraded to ‘hold’ from ‘buy’ by analysts at Jefferies as the broker saw a gathering storm around the firm’s single listing but it is one of a series of issues as the consumer goods giant heads for “choppier waters”.
In a note to clients, Jefferies’ analysts said while the potential shift away from “Europe’s most liquid capital market and most liberal takeover regime” was a point of regret, the listing controversy was “a relative sideshow” with other near-term risks approaching.
READ: Aviva asset management arm says it will vote against move by Unilever to scrap FTSE 100 listing
The most tangible of these, Jefferies said, was the risk of flowback in the form of UK-only investment funds selling off Unilever shares in the event that it moves out of the UK.
The broker said the index selling could amount to a net flowback of around US$1.5bn, or 1% of the company’s market cap, which despite being relatively small could cause “material impact relative to average daily volumes if such selling occurs in the run-up to Christmas, when the new NV shares list”.
The chorus of institutional investors opposing the move, which include Aviva PLC's (LON:AV.) asset management arm, was joined on Monday by asset management firm Schroders PLC (LON:SDR), the 28th largest shareholder with 0.68% of the shares.
Trouble at the top?
Another issue was the drain on management time caused by the simplification initiatives at the firm, particularly with speculation swirling around a potential change in leadership from incumbent chief executive Paul Polman who had evidenced “a distinctly end-of-termish style at last year’s investor seminar”.
Jefferies also cited a Sky News report that there have been threats of a proxy contest around the company’s chairman and chief financial officer at its next AGM.
Emerging markets risk
While the board and listing controversies were drawing most of the media attention, analysts said a bigger concern to Unilever’s trading outlook was ongoing turmoil in Argentina and Turkey, markets that compromise 4% of its sales.
The broker cited Argentina’s cumulative three-year inflation rate of over 100% as an issue that would amount to a 20-basis point reduction in organic growth for Unilever relative to the second quarter.
Jefferies added that the company’s sixth biggest market, Indonesia, was also looking bad with wage growth lagging behind inflation, as well as competitive pressure from the domestic Wardah cosmetics brand which has eroded Unilever’s share of the country’s skincare market by 900 basis points in five years.
Issues with innovation acquisitions
Finally, the broker cited problems with the so-called ‘speedboat’ acquisitions, innovative companies acquired by Unilever to scale the product at a faster rate with high valuation multiples.
While analysts had been “strongly supportive” of this strategy, they added that it was only effective if sales remained high, with recent company commentary on the acquisitions sounding more downbeat by comparison.
This was compounded by the fact that the prestige skincare business “apparently only grew 6%” in the second quarter, as well as “below plan” sales of non-shave grooming products at its flagship ‘speedboat’ acquisition, Dollar Shave Club, which entered the UK market at the end of last year.
As a result, Jefferies cut their headline forecasts for the firm 1%-2% at constant currency while also lowering organic sales forecasts by 45 basis points for 2018 and 85 basis points for the third quarter on the assumption that the company would adopt hyperinflation accounting for Argentina due to high inflation.
Jefferies also cut the lead European price target for Unilever to €51.50 based on the gloomier forecasts, which through the same multiples and exchange rates led to an increase in the London-listed price to 4,590p from 4,480p, with both carrying a price-earnings ratio of 19.5x.
In lunchtime trading Tuesday, Unilever shares were down 1.1% at 4,180p.