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Unilever drops to nine-month low but cash flow supports valuation, say analysts

“While it’s a shame growth won’t be stellar for a while, this is just a bump in the road and not an outright stalling of the engine”

Unilever PLC -

As Unilever PLC (LON:ULVR) shares dropped to a nine-month low on the back of its warning about soft sales, analysts remained supportive of the maker of mayonnaise, clothes softener and deodorant.

The consumer goods giant revealed sales growth had remained below target in the fourth quarter, following a slowdown in the previous quarter.

READ: Unilever issues warning as growth fails to speed up

To blame were a slowdown in South Asia, difficult trading conditions in West Africa and ongoing softness in developed markets.

One of the main reasons for the slower growth in South Asia was India, one of the group’s largest markets.

This is not entirely company-related, pointed out broker Liberum, as it stems from a crackdown on non-bank lending and rising unemployment which is dampening domestic demand, “particularly in the rural locations where Unilever is strong”.

More importantly for Liberum’s analysts, the company said neither earnings or cash are expected to be impacted by the slower top line.

“While sector valuations are heavily influenced by top line growth forecasts, Unilever is right to deflect any negativity about the top line by focusing on its profit, margins and cash delivery,” Liberum said.

“Unilever's profit, margin and cash delivery continues to support Unilever's valuation in light of a slower top-line.”

Seeing the positives

Moreover, the Anglo-Dutch group reported signs of improving performance in North America, while cautioning that a full recovery will take time.

"Weaker sales growth is a problem, but lately we have been encouraged that earnings growth is being driven by price rather than volume," said Neil Wilson of Markets.com.

All in all, the longer-term attractions of Unilever still exist, reckoned Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.

“A huge chunk of the world’s population uses a Unilever product every single day, and margins aren’t in jeopardy following today’s announcement.

“While it’s a shame growth won’t be stellar for a while, this is just a bump in the road and not an outright stalling of the engine.”

Quick facts: Unilever PLC

Price: 4321 GBX

Market: LSE
Market Cap: £113.57 billion

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