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(Excluding References, Appendix, tables, name of graphs/figures/tables, figure captions, table
captions, abbreviations)
Abbreviations:
Introduction:........................................................................................................................5
Executive summary:............................................................................................................5
Company Overview:............................................................................................................6
Financial Position:...............................................................................................................8
Future of Unilever:............................................................................................................11
Shareholder Value Analysis (SAV):..............................................................................11
Total Shareholders Return Analysis:.........................................................................12
Market Value Added (MVA):...................................................................................14
Economic Value added (EAV):.................................................................................15
Dividend Payout................................................................................................................16
Effective Market Hypotheses:...........................................................................................17
Share price movement:......................................................................................................18
Equity Evaluation:.............................................................................................................20
Net Asset Value:............................................................................................................20
Price/Earning Value (P/E):............................................................................................22
Discounted cash flow:....................................................................................................23
Revenue Growth:.......................................................................................................24
Operating margin:......................................................................................................24
Depreciation and Amortization (D&A):....................................................................25
Tax Rate:....................................................................................................................25
Capital Expenditure:..................................................................................................26
Working Capital:.......................................................................................................26
Free Cash Flows:.......................................................................................................27
Cost of Equity:...................................................................................................................27
Gordon Growth Model:.................................................................................................27
Capital Asset Pricing Model:.........................................................................................28
Free Cash Flow (FCF) and Net Present Value:.................................................................29
Terminal Value:.................................................................................................................30
Sensitivity Analysis:..........................................................................................................30
Long Term Growth Rate:...............................................................................................31
Best Case Scenario....................................................................................................31
Organization valuation remains critically important for any investor irrespective of the
economic market conditions. It is only after valuation, an investor makes buying or
selling decisions and estimates true value of the company. Brealey and Myers (1996)
claims, knowing the value of the asset enables the stakeholders of a company to make
intelligent decisions. Every investor has his/her own valuation methodology, however,
the underlain valuations principles, such as NAV, P/E, DCF and many such, for any
investors more or less remains the same. Therefore, the premise of valuating the chosen
organization is that a realistic estimation is made on the assets bases through publicly
available information.
Executive summary:
This report is on shareholders value and market evaluation for Unilever (PLC), also
called as the Unilever Group or Group. The report begins with the overview of the
company, giving the present market situation and the market share of Unilever in
consumers goods, home and personal care and packaged food industry in the U.K.
Followed by the financial situation which talks about Unilever’s performance for the
fiscal year 2010. A critical evaluation has been made on the in fluctuations in the
turnover, operating profit, earnings per share and on long term debts. The prospects of
Unilever are discussed in the later section, by using detailed analysis of TSR, P/E and
EAV, in addition, comparison are made with peer groups such as Colgate-Palmolive,
Procter & Gamble and Reckitt Benckiser. Comments are also made on the Dividend
payout practice of the above companies. Share price movement of Unilever, from 1st Feb
2010 to 31st Jan 2011 is discussed in the following section. Different methods of equity
evaluation are used to took at the prospects of Unilever for 10 year period from the base
year. A detailed cash flow is also made considers various favoring and adverse
conditions.
Company Overview:
Unilever, Chaired by Michael Treschow, is a €44.3 billion turnover, fortune 500
(Ranked: 121, Source: CNNMoney.com), global conglomerate in food, home and
personal care products, having presence in more than 180 countries with 167000
employee. Unilever claims that 150 million times a day, someone somewhere chooses a
Unilever product. The top 12 brands, Axe/Lynx, Blue Band, Dove, Becel/Flora,
Heartbrand ice-cream, Hellmann’s, Knorr, Lipton, Lux, Omo, Rexona and Sunsilk
contribute €1 billion to sales and top 20 brands contribute 70% of the total sales.
(Unilever, 2010 financial report)
Unilever N.V (N.V) is a public Unilever N.V. (NV) is a public limited company
registered in the Netherlands. Unilever PLC (PLC) is a public limited company registered
in England and Wales. It has shares listed on the London Stock. However, the two parent
companies, NV and PLC, together with their group companies, operate as a single
economic entity (the Unilever Group, also referred as the Unilever.
In the year 2009, Unilever sharpened it product portfolio by acquiring Sara Lee personal
care business and in the year 2010, Unilever announced the acquisition of Alberto
Culver.
In the U.K, Unilever has been increase its market share percentage in Beauty and
Personal Care, Home care, and packed foods since 2001 and has seen a steep increase in
both Beauty care and care products during the year 2005.
1
0.15 0.21 0.21 0.21
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 1: Beauty and Personal Care Percentage Market Share (Source: Global Market Information
Database)
20
18 17.18
15.15 15.78
16 14.94 14.63
14
12
10
8
6
4
1.05 1.07 1.17 1.26
2
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 2: Home Care Products Market Share (Source: Global Market Information Database)
2
1.8 1.72 1.66 1.68 1.69 1.65 1.64
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2 0.01 0.01 0.02
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 3: Packaged Food Market Share (Source: Global Market Information Database)
Though Unilever has low market presence in the U.K, it has been ranked 6 th in global
Health and wellness industry with 1.4% market share, 10.4% in the Home Care and is
ranked number one, globally, in the ice-cream industry with a global market share of 18%
(Global Market Information Database).
Figure 4: Global Home Care Market Share (Source: Global Market Information Database)
Financial Position:
In the recent economic downturn, many organization had to face sever cash flow
problems due to low consumer spending; fall in sales and low liquidity. However,
Unilever, on the contrast, has experienced best volume growth for more than 30 year,
increased its sales growth by 4.1% and increased its operating margin by 15%.
Financial Report
50,000 44,262
39,642 40,187 40,523 39,823
40,000
E millions
30,000
20,000
0
2006 2007 2008 2009 2010
The 15% increase in the operating profit or the 11.1% increase in the turnover cannot be
completely attributed to the 5.4% increase in the volume sales. As a global conglomerate,
the average 7.3% currency variation also contributed to the increase in the operating
profit. The decrease in the net cash flow from operating activities by 4.9% between the
years 2009-10 supports the above argument. The net income, in the 2010 annual report,
also reflects decreased restructuring costs, decreased financial costs and increase from
business disposals. Though there was a volume growth, due to current economic
conditions and intense competition, Unilever had to price its products with minimal
margin. However, with the current focus on BRIC nations and penetration in to African
continent could help Unilever achieve economics of scale and increase its operating
margins. In addition, Unilever’s financial performance was significantly good when
compared with its competitors such as P&G, with 4.2% increase in operating income and
2.9% increase in the net sales, and Nestle, with 1.9% increase in the net sales.
2 1.79
1.8
1.6 1.46
1.32
1.4 1.19 1.21
1.2
euro
1
0.8
0.6
0.4
0.2
0
2006 2007 2008 2009 2010
During the year 2008-09, there was a drop in EPS by 32.4%, this drop was not with the
performance of the company, but due to the earning earned by disposals of European
frozen food business during 2007-08. Nevertheless, EPS continued to rise by 21% during
2009-10 Y-o-Y.
Long Term Debt
12,000
9,971
10,000 8,823
8,000 7,289
E million
6,000
4,000
2,000
0
2008 2009 2010
Future of Unilever:
The penetration into African continent by launching more than 100 products (OMO being
the most successful one so far) and increasing market share in the BRIC nations shows a
potential growth prospects for Unilever in the coming years. The increase EPS Y-o-Y
since 2005 attracts new investors for long-term investment. The acquisition of Sare Lee
in 2009 and the acquisition announcement of major European home and personal care
brand Alberto Culver help Unilever to widen its product portfolio and increased markets
share in the existing European and global market.
Shareholder Value Analysis (SAV):
SAV helps in ascertaining value add to the shareholders of a firm. Rappaport’s (1986)
SAV pyramid says focus on “Value Drivers” can help to add value to shareholders
wealth, and created confidence in the market to attract new investors.
Unilever has been consistently delivering value to its shareholders. As a consumer goods
industry, Unilever’s prime focus is to increase markets share, either by increasing sales or
through acquisitions and partnerships, entering new geographies and improving brand
value globally. In addition, in changing market environment and concern for environment
also enabled Unilever to invest significantly into research, development and innovation.
From a strategic point of view, these business focuses are key value drives to improve
cash flow and the consistent A+/A1 long-term credit rating and A1/P1 short-term credit
rating are good signs to generate finance for operation. However, the value added by
Unilever to its shareholders can be calculated using three methods, such as:
1. Total Shareholders Return
2. market Value Added
3. Economic Value Added.
The dividend payout of Unilever is progressive since 2006, however, it is very low when
compared with its peer groups. Nevertheless, Unilever is among the top three players in
the global consumer goods, health and personal care, and packaged foods in TSR
percentage.
Dividend Payout
1.6
1.4
1.2
1
GPB
0.8
0.6
0.4
0.2
0
2006 2007 2008 2009 2010
Unilever 0.46 0.49 0.55 0.64 0.7
Colgate Palmolive 0.19 0.78 1.23 1.51
Reckitt Benckiser 0.21 0.5 0.62 0.92 1.07
Procter & Gamble 0.2 1.23 1.23
Unilever practices two-dividend payout each year. In 2009, there was an increase of 14%
in dividend payout, though not the highest percentage change in the industry sector, but
was certainly highest in the history of Unilever so far. In addition, in the same year, the
share price rose by 139p, which can be attributed to the acquisition of Sara Lee’s home
and personal care segment. In 2010, Unilever paid quarterly divided, as never before,
with an increase of 9%, nevertheless, it is one in its sector to pay highest divided. An
interesting point to note here is TSR is seldom negative, even in current economic
conditions, although there has been slack growth in the share price. Therefore, it can be
deduce that, packed food industry experiences less impact by economic depressions when
compared with other industry sectors.
TSR Graph
2010
2009
Reckitt Benckiser
2008 Colgate Palmolive
Unilever
2007
2006
-20 -10 0 10 20 30 40 50 60
TSR Percentage
Considering the interim share price value on 26th March 2006, the price per share and
purchase value was 1,306.67 GBp, would price 1795 GBp as on 14th March 2011, which
is an increase by 37.37% and a total return of 488.33 GBp, which is significantly good
return when compared with the -6.5% return with FTSE 100 industry. In spite the
promising figures, the economic factors governing (directly or indirectly) cannot possible
tell the true value added to the shareholders.
The higher MVA in the last two years for Unilever can be attributed to the acquisition of
Sara Lee and Alberto Culver, however, no clear statement in given in the annual report as
by how much this value has been increase/decrease by the recent acquisition.
Nevertheless, to make the most of out the MVA method, it is advised to segment
products that gives positive NPV.
4000 3542.324
3500 3159.96
EVA in m Euros
3000
2500 2236.56 2121.803
2000 1625.64
1500
1000
500
0
2006 2007 2008 2009 2010
The EVA however, does not give the true picture of the value, the organization has added
to its shareholders. In the above case, EVA is decreased due to increase in investment and
decrease in NOPAT, however, with recent updates in product portfolio (by acquisition)
and targeting new geographies add value to the shareholders investments.
Dividend Payout
Dividend Payout
Unilever 2006 2007 2008 2009 2010
Earnings Per Share (EPS) in P 115.00 128.00 173.00 117.00 146.00
Dividend Per Share (DPS) in P 48.00 51.00 61.00 41.00 71.00
Dividend Cover (EPS/DPS) 2.40 2.51 2.84 2.85 2.06
Dividend Payout Ratio (DPS/EPS) in % 41.74 39.84 35.26 35.04 48.63
Share Price as on Jan 31st in P 1330.00 1390.00 1623.00 1389.00 1910.00
Dividend Yield (DPS/Share Price) 3.61 3.67 3.76 2.95 3.72
Colgate Palmolive
Earnings Per Share (EPS) in P 90.28 165.00 180.00 313.00 283.00
Dividend Per Share (DPS) in P 45.87 72.24 76.75 123.15 133.34
Dividend Cover (EPS/DPS) 1.97 2.28 2.35 2.54 2.12
Dividend Payout Ratio (DPS/EPS) in % 50.81 43.78 42.64 39.35 47.12
Share Price as on Jan 31st in P NA 7796.00 6854.00 8215.00 7955.00
Dividend Yield (DPS/Share Price) NA 0.93 1.12 1.50 1.68
Reckitt Benckiser
Earnings Per Share (EPS) in P 93.50 127.90 154.70 194.70 213.80
Dividend Per Share (DPS) in P 41.50 55.00 80.00 100.00 115.00
Dividend Cover (EPS/DPS) 2.25 2.33 1.93 1.95 1.86
Dividend Payout Ratio (DPS/EPS) in % 44.39 43.00 51.71 51.36 53.79
Share Price as on Jan 31st in P 1994.00 2612.00 2607.00 2694.00 3256.00
Dividend Yield (DPS/Share Price) 2.08 2.11 3.07 3.71 3.53
200
180
160
140
Dividend Yield (DPS/Share
Percentage
120
Price)
100
80 Dividend Payout Ration
60
40
20
0
2006 2007 2008 2009 2010
48.63% dividend payout ration in 2010 and the increasing value of it since 2006 is
evident that Unilever’s management aims to return funds to its shareholders. This is a
good attempt to retain the confidence of current shareholders and to attract new one.
The London Stock exchange is considered to be the global hub of finance market,
therefore the U.K law imposed strict law on the markets to for effective operations.
Nevertheless, some false information often speculates among investors. Therefore, LSE
is to be between semi-strong and strong form, where the stocks react rationally to both
past performances and publicly announced information as evidenced by the stock price
movement.
1st Feb 2010: Cadbury’s shareholders received a tidy profit due to the courtesy of Kraft,
which boosted proceedings to retain exposure to consumer goods industry
26th Mar 2010: Qinetiq to downgrade to sell from its house broker, created ripples in
market causing negative in the first day four.
5th April 2010: Unilever marketing chief commented on there inability to focus on digital
media advertizing.
1st May 2010: Announced volume growth on ice-creams by cutting cost, and introduced
‘Dove’ brand products for men.
21st June 2010: The drop was seen after Unilever announced, Mr. KFC Weed (Director),
transferred 4000 Unilever PLC ordinary shares to his spouse. In addition, he sold 12, 057
Unilever shares at the price £19.02 per share.
5th July 2010: share price shot up as Unilever was awarded as the company of the year in
the community’s responsibility business awards.
05th August 2010: The drop got steady, when Unilever CEO announced 2010 first half
yearly results, Turnover up by 9.7% at Turnover up 9.7% at €21.9 billion, Underlying
volume growth 6.6%, Underlying sales growth 3.8% , underlying price growth (2.6)%,
Underlying operating margin up 30bps, Net cash flow from operating activities €2.2
billion, up €0.2 billion, Fully diluted earnings per share €0.70.
15th Sept 2010: Share price accelerated after Unilever announced management actions
for sustainable growth.
14th Oct 2010: UN’s initiative to collaborate with multinational companies to combat
poverty, positively affected Unilever’s share price as it took it as a corporate social
responsibility.
04th November 2010: Share price kept rising when 3rd quarter and 9 months results were
announced. 4.8% volume growth, 3.6% sales growth, operating profit up by 20bsp,
turnover up 10.9%, fully diluted EPS €1.13 up 29%
6th December 2010: Unilever completes SARA LEE Personal Care & European Laundry
Acquisition.
24th Jan 2011: Analyst report says, 50% of Unilever’s raw materials comes for forest.
Excessive rain in Canada and Pakistan, droughts in Russia and US cutting exports and
stocking agriculture material created tensions for Unilever, which imports majorly from
all these countries, creating lowering share price in the market.
Equity Evaluation:
The shareholder theory suggests that the financial decisions made in a firm are focused
on value creation to its shareholders (Muller 2009). The use of evaluation helps
management to make seasoned financial decisions, such as:
Acquisition
Reacting to takeover bid
IPO floatation
Privatization
Management buy-out
Any one of the actions can be taken on an organization using Net Asset Value,
Price/Earning ratio (P/E), Discounted Cash flow methods.
NAV = [Fixed Assets + Current Assets] – [Current Liabilities + Long Term Debt]
25
19.06
20
14.3
NVA/share
15
11.78
10.48
10
4.61 4.95
5
0
2010 2009
Figure 15: NAV per Share (Source: Financial Reports of Unilever, Colgate Palmolive and P&G)
Although the NAV per share of Unilever has increase by 21.4% since 2009, its absolute
value is less in comparison with P&G, which grew 81.9% since 2009. However, this
steep increase in NAV per share % for P&G is due less number of ordinary share in 2010
compared to 2009. However, when Unilever and P&G are compared on business scale,
the NAV/Share of both is justified.
P/E Ratio
Unilever Coalgate P&G
Earnings per Share (in p) 146 283 241
Share Price on 31st Jan/11 1816 7955 4700
P/E Ratio 12.44 28.11 19.50
No. of Share 1310.1 733 2843.5
P/E Value 16295.49 20604.29 55454.15
P/E Value
55454.14
60000
50000
40000
20604.29
30000 16295.49
20000
10000
0
Unilever Colagate P&G
Figure 16: P/E Value (Source: Financial Report of Unilever, Colgate and P&G)
The P/E value however, does not represent the actual trust of shareholder in investing in a
company, the reason being, the fundamental principles of P/E value calculation. It look at
the profit which can be changed either by retaining earnings (not paying dividends), or by
decreasing number of shares (which is not a good idea). Although, Unilever’s P/E value
is low when compared with the peer group, its recent entry into new geographies and
successful merge of Sara Lee’s home and personal care products, are enough to talk
about the effective management and prospects in future and in investors trust.
For valuing purpose, one needs to zero-in on a fair P/E value. This is a subjective process
and it depends on lots of factor. For brevity, the fair P/E value calculation is:
The cash flow of Unilever is forecasted based on publicly available information on its
sustainable growth strategy. The forecast is made for the next 10 year, and the enterprise
value is determined at terminal year. The beauty of DCF is that, it controls the forecasting
errors by discounting cash flows to find NPV; in addition, the remote years are
discounted more stringently than the close years to further minimize errors.
Revenue Growth:
Unilever has recorded highest volume growth in 2010 in sever economic conditions.
With shoots of recovery of the current economic downturn and focus on emerging
markets can help Unilever maintain sustainable growth of over 3% for the next 10 year. It
is likely that, Unilever could see an increase in revenue by 5.1% for the next 5 year,
which can drop (calculating most pragmatically) to 4.6% in the 2015 and 2016, to 3.8%
in 2019 and finally at 3.6% in 2020. However, on a very optimistic assumption, it is
likely that Unilever can grow 5% annually. (Appendix 3 for historic growth)
Revenue Growth by Discounted cash flow
2010
(Base) 2011 2012 2013 2014 2015 2016 2017 2019 2020
% increase in
Revenue 4.1 5.1 5.1 5.1 5.1 5.1 4.6 4.6 3.8 3.6
Sale Revenue 4651 4889 5138 5400 5676 5937 6210 6446 6678
in € m 44262 9.36 1.85 5.33 5.99 0.29 1.26 2.34 2.23 2.87
Operating margin:
Ever since 2006, Unilever has been maintaining an operating margin above 10%. In
2010, it has seen 14.3% operating profit, which is 10 year high. However, this is expected
to grow with the advent of technology implementation in operations, in addition,
Unilever has also started a supply chain management program across the global
(Unilever.com, 2010). This can help maintain operating margin above 14%, which means
86% goes into operating costs.
2010
(Base) 2011 2012 2013 2014 2015 2016 2017 2019 2020
% increase in
Revenue 4.1 5.1 5.1 5.1 5.1 5.1 4.6 4.6 3.8 3.6
Sale
Revenue in € 4651 4889 5138 5400 5676 5937 6210 6446 6678
m 44262 9.36 1.85 5.33 5.99 0.29 1.26 2.34 2.23 2.87
Operating
cost % 85.7 85 85 85 85 85 85 85 85 85
Operating 37932. 3954 4155 4367 4590 4824 5046 5278 5479 5676
Cost in m 534 1.46 8.07 7.53 5.09 6.25 5.57 6.99 2.9 5.44
Operating
Margin (%) 14.3 15 15 15 15 15 15 15 15 15
EBITDA in € 6329.4 6977 7333 7707 8100 8514 8905 9315 9669 1001
m 66 .904 .777 .8 .898 .044 .69 .351 .335 7.43
Depreciation and Amortization (D&A):
The D&A rate for Unilever since 5 years has been over 3.4%, the average depreciation
for last three years has been 3.68% (see Appendix 5), and it is assumed that it is like to
continue for the next 5 years. It should be noted that, Unilever does not include free land
cost into depreciation, therefore only plants, machineries and other perishable equipment
are considered while calculating depreciations. However, the depreciation rate could
increase to 3.8% for the next two years due to obsolescence of technology and finally to
4.0% in the terminal years. Unilever, also considers Depreciation as an operating expense
while arriving at profit, but is added later in the cash flow as it is cash less expense. In
addition to D&A, as a global conglomerate, Unilever has experienced 7.1% financial
loss, which can be attributed to instability in the currency market, which is assumed
constant for the next 10 years.
2010
(Base) 2011 2012 2013 2014 2015 2016 2017 2019 2020
% increase in
Revenue 4.1 5.1 5.1 5.1 5.1 5.1 4.6 4.6 3.8 3.6
Sale
Revenue in € 4651 4889 5138 5400 5676 5937 6210 6446 6678
m 44262 9.36 1.85 5.33 5.99 0.29 1.26 2.34 2.23 2.87
Operating
cost % 85.7 85 85 85 85 85 85 85 85 85
Operating 37932. 3954 4155 4367 4590 4824 5046 5278 5479 5676
Cost in m 534 1.46 8.07 7.53 5.09 6.25 5.57 6.99 2.9 5.44
Operating
Margin % 14.3 15 15 15 15 15 15 15 15 15
EBITDA in € 6329.4 6977 7333 7707 8100 8514 8905 9315 9669 1001
m 66 .904 .777 .8 .898 .044 .69 .351 .335 7.43
D&A as % 3.4 3.68 3.68 3.68 3.68 3.68 3.68 3.8 3.8 4
215.20 256. 269. 283. 298. 313. 327. 353. 367. 400.6
D&A in € m 1844 7869 883 647 113 3168 7294 9834 4347 972
Other
expenses as
(%) 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1
Other
expenses in € 449.39 495. 520. 547. 575. 604. 632. 661. 686. 711.2
m 2086 4312 6982 2538 1637 4971 304 3899 5228 376
5664.8 6225 6543 6876 7227 7596 7945 8299 8615 8905.
EBIT in € m 7207 .686 .196 .899 .621 .23 .656 .978 .377 496
Tax Rate:
As one of the world’s leading financial capital market, the government of U.K has
maintained stable taxation rate. The corporate tax rat which was 28% in 2010 was
reduced to 27% in 2011, which is least in the major G7 economies, a major advantage for
multinational companies (HMRC.gov.uk, 2011). It is also likely that, to boots economy,
U.K government would further reduce the corporate tax rate to 26% during 2019 and
2020.
However, to raise cash, Unilever make long-term debts, the interest to which on an
average is calculated as 6.37% (see appendix 2)
5664. 6225 6543 6876 7227 7596 7945 8299 8615 8905
EBIT in € m 87207 .686 .196 .899 .621 .23 .656 .978 .377 .496
Tax in (%) 27 27 27 27 27 27 27 27 26 26
1529. 1680 1766 1856 1951 2050 2145 2240 2239 2315
Tax Paid 51546 .935 .663 .763 .458 .982 .327 .994 .998 .429
Interest payable
after tax in (%) 6.37 6.37 6.37 6.37 6.37 6.37 6.37 6.37 6.37 6.37
3871. 4255 4472 4700 4940 5192 5430 5673 5969 6170
Net Earnings € m 93439 .25 .268 .354 .072 .015 .848 .027 .268 .28
Capital Expenditure:
The average capital expenditure since 2006 is 2.9%, however, it was 3.9% for 2010,
which has been increasing since 2008. This increase can be attributed to Unilever’s rapid
expansion in to support the growing volume growth by investing in building new
capacities in the emerging markets. It is assumed that, to increase global market share
Unilever keeps investing in new geographies at a rate of 3.9%.
3871 4255 4472 4700 4940 5192 5430 5673 5969 6170
Net Earnings € m .93 .25 .26 .35 .07 .01 .84 .02 .26 .28
Investment in (%) 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
1726 1814 1906 2004 2106 2213 2315 2421 2514 2604
Investment in € m .21 .25 .78 .02 .23 .65 .47 .99 .02 .53
Net Earnings after 2145 2440 2565 2696 2833 2978 3115 3251 3455 3565
investment € m .71 .99 .48 .32 .83 .36 .36 .03 .24 .74
Working Capital:
Using historic data (see Appendix 9) of Unilever it is estimated that 3% of the total
revenue generated is used as working capital. For any organization to work smoothly,
working capital is essential. Negative working capital in the historic data suggest that
Unilever was in cash debt. Using a optimistic approach, it is assumed that 3% of the
working capital would be required for Unilever through out the next 10 year period. This
is also justified by Unilever’s expansion plans to handle increasing volume growth.
Net Earnings after 214 244 256 269 283 297 311 325 345 3565
investment € m 5.72 1.00 5.49 6.33 3.84 8.36 5.37 1.04 5.24 .75
Estimated working capital 0.00
as (%) of revenue 23 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
139 146 154 162 170 178 186 193 2003
Working Capital 1.02 5.58 6.76 1.56 0.18 2.81 1.14 3.07 3.87 .49
139 71.1 74.8 78.6 82.6 78.3 81.9 70.8 69.6
Change is working capital NA 4.56 7 0 2 3 3 3 0 2
336 350 368 386 406 427 449 469 491 5101
Free Cash Flow (FCF) 5.00 2.97 1.62 9.38 6.72 4.12 2.10 8.74 4.88 .64
Cost of Equity:
The cost of equity is the return that a common share holder expects in return to the
investment made. There are two methods to calculate:
GRM : Gordon Growth Model
CAPM : Capital Asset Pricing Model
80
70 71
61
60 51
48
50
in p
40
41
30
20
10
0
2006 2007 2008 2009 2010
Figure 17: Unilever's Dividend per Share (Source: Unilever Annual Report, 2010, 2009, 2008, 2007,
2006)
The difference between ERM and RF is regarded as market risk premium. Beta value (β)
is analyzed on greater than or less than value over one. If β<1 low risk, hence low reuters.
If β>1, high risk, high reuters. β for a company varies years on year bases, and different
analyst predict different values for β.
Beta value
Source Unileve P&G Colgate
r Palmolive
Reuters.co .66 0.518 0.4892
m 7
Sales Revenue:
Best Case Scenario
Assuming that an optimistic economy has boots the sales of Unilever on an average of
8% increase for the next 10 years.
Present Value at the Nth year = CF/(r-g)
CF = Actual final year FCF = € 5101.64 million
r = discounted rate = 8%
Conclusion:
Different analysis suggests that Unilever is under performing compared to the market on
the whole, however, this tread is not only with Unilever but also across every industry of
its type. When Unilever is compared with its peer groups, even in the present economic
conditions, its is either performing better or equal. Though cost of equity, different
scenarios are considered for effective and ineffective performance of Unilever. It is
therefore advised that the shares of Unilever should be kept on hold, as it is certainly
expected to rise as the economy recovers. Unilever’s focus on emerging markets and
rapid expansions plans supposed to the advice of ‘Hold’.
Hol
Strong Buy d Strong Sell
Reference:
Brealey, R., and Myers, S. (1996). Principles of Corporate Finance, 5th edition. New
York: McGraw Hill Publication.
Pike,R. And Neale,B. (2009). ‘Corporate finance and Investment – 6th edition’. Pearson
Education Limited, Essex.
Rappaport, A. (1998). Creating Shareholder Value: a Guide for Managers and Investors,
2nd edition. New York: The Free Press.
Online References:
BankOfEngland.co.uk [ND]
http://www.bankofengland.co.uk/publications/fsr/2010/fsr28.htm [Accessed on
13.03.2011]
Reuters.com[ND] http://www.reuters.com/finance/stocks/financialHighlights?
symbol=UL.N [13.03.2011]
Unilever.com
http://www.unilever.com/investorrelations/annual_reports/AnnualReportandAccounts201
0/Winningthroughcontinuousimprovement.aspx [07.03.2011]
Appendix:
Appendix 1: Currency Conversions
International Currency
1 USD 2006 2007 2008 2009 2010
1 GBP 0.367 0.514 0.492 0.716 0.657
1 Euro 0.82 0.75 0.634 0.77 0.73
Working capital
Sales Current Current Working as % of total
Unilever Revenue Assets Liabilities Capital revenue
2006 39642 9501 11516 -2015 5.082992785
2007 40187 9928 10924 -996 2.478413417
2008 40523 11175 11970 -795 1.961848827
2009 39823 10811 12881 -2070 5.198001155
2010 44262 12484 12483 1 0.002259274
Average 2.943799382