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Investors must reassess if a company’s management changes – we have done just that with Unilever


No company management team lasts forever. Inevitably, chief executives either find themselves replaced because of underperformance, leave to take up opportunities elsewhere or retire to enjoy the fruits of their labour.

As a result, long‑term investors must regularly decide whether to stick with a company following management changes or exit to avoid the unknown of a new regime.

Questor faces such a quandary with Unilever. The global consumer goods company, which owns brands such as Magnum and Hellmann’s, will have a new boss by the start of 2024 after Alan Jope recently announced his departure. He has been with the company for 35 years and became chief executive at the start of 2019.

Over his tenure he has failed to deliver strong earnings growth. Underlying earnings per share have risen from €2.36 in 2018 to €2.62 in 2021, which equates to an annualised growth rate of 3.6pc. Over the same period the stock’s price is flat, against a 10pc gain for the FTSE 100.

Of course, major challenges such as the pandemic and the current economic slowdown have not been conducive to improving financial performance in recent years. Moreover, Jope has overseen substantial structural change within the business, which is likely to create a nimbler and more flexible entity that can better respond to changing consumer tastes over the coming years.

Unilever’s latest quarterly trading update suggests that it continues to enjoy a significant competitive advantage over rivals in an era of high inflation. It was able to pass higher input costs on to customers, with underlying sales growth accelerating to 10.6pc in the third quarter. This prompted it to raise sales guidance for the full year, while it maintained its margin forecast over the same period.

Indeed, it said it expected an improvement in underlying operating margin over the next two years as its €600m cost‑saving programme bears fruit. This could provide its shares with scarcity value in an era when high inflation makes margin growth increasingly elusive for many companies.

The business has increased its focus on digital direct‑to‑consumer sales over recent years. E‑commerce sales grew by 44pc last year and accounted for 13pc of total sales. Online sales can cut out retailers and provide scope for higher margins and greater customer loyalty over the long run.

The company has also continued to reshape its portfolio of brands. In the latest quarter it completed the sale of its global tea business and confirmed the acquisition of Nutrafol, a “hair wellness” product specialist.

Unilever has the financial means to make further changes to its portfolio – notably via acquisitions while asset prices are low – thanks to its solid balance sheet. Its net‑debt‑to‑equity ratio of 125pc is comfortable given the company’s size and diversity.

Meanwhile, its net interest coverage ratio of 20 in the first half of the year suggests that it can service substantially greater debt levels even in a period of rapidly rising interest rates.

Since this column tipped it as a buy in August 2019, the share price has fallen by 18pc. In doing so, it has underperformed the FTSE 100 index by 23 percentage points.

Despite its disappointing performance, and the uncertain trading conditions it currently faces as global economic growth slows, the shares trade at a relatively rich 19 times forecast earnings. But in Questor’s view the company is worthy of its high valuation because its solid financial position and clear competitive advantage make it well placed to overcome short‑term economic threats.

It also offers long‑term growth potential as the markets in which it operates produce attractive growth and its operations evolve to include a greater proportion of digitally‑focused brands that are aligned with changing consumer tastes.

Therefore, while the next couple of years are likely to represent a period of major change as Unilever seeks a new boss, its sound fundamentals suggest that it merits investment on a long‑term view. Keep buying.

Questor says: buy
Ticker: ULVR
Share price at close: £41.17

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