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Unilever's Polman Starts to Work His Magic

Source: Reuters
25/05/2009

London, May 22 - Unilever's shares have rallied nearly 20 percent in the 15 days since new chief Paul Polman unveiled his vision for the consumer goods giant and there may be more to come as it closes the gap on European rivals.

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The strategic shake-up, a fall in commodity costs seen later this year as forward contracts unwind as well as the valuation gap with peers is tempting investors back to Unilever Plc/NV after a decade of underperformance.

Earlier this month, Polman outlined his message to improve volume sales without hitting profit margins by driving Unilever's strong brands harder such as Dove soap and Knorr soups, and focus on growth areas within its business.

He will get a massive boost from lower commodity prices in the second half of 2009 as the cost of key items such as vegetable oils, tea and packaging tumble to give him scope to feed the savings through into extra marketing support.

Unilever's commodity costs should peak in the second-quarter, but then ease as the company is guiding towards flat commodity costs for 2009 as a whole and then analysts expect 2010 costs are likely to be lower than in 2009. However, Polman will need all the help he can get as he will find it tough to raise prices in a recession and will have to get volumes moving forward by the end of the year when the effect of last year's price rises fade.

BOOM-BUST OVER?

Analysts and investors have warmed to Polman's open, confident and dynamic style and are encouraged by his lack of excuses and commitment to continually raise marketing spend.

In the past Unilever has often been on the defensive and prone to boom-bust cycles of investment behind its brands.

Unilever Plc's shares jumped to 15.54 pounds last week and were trading up 0.3 percent at 14.88 pounds at 1030 GMT, still will up from the 13.14 pound close the day before Polman outlined his vision with first-quarter results on May 7.

"We now see sufficient progress on many strategic, operational and cultural aspects at Unilever that we feel it is time to turn positive on the stock," said Bernstein Research analyst Andrew Wood.

The stock is responding with Unilever trading on 12.1 times 2010 consensus earnings compared with Nestle on 12.9 and Danone on 13.1, with the rating gap much narrower than last summer.

Wood believes that Unilever could trade at parity to its global rivals while others are more bullish.

Analyst Jeremy Batstone-Carr at broker Charles Stanley said: "The shares' valuation is comparable with that of Nestle but prospects are, in our view, potentially better."

Polman took over at the Anglo-Dutch group at the start of 2009 after 28 years with its bigger consumer goods rivals Procter & Gamble and Nestle. He made a good start with first-quarter underlying sales rising 4.8 percent while volume fell just 1.8 percent, both beating analyst forecasts.

Unilever's volumes suffered in 2008 and first-quarter 2009 largely from the significant price rises pushed through to recover commodity hikes and the economic slowdown with negative volume growth seen in three of its last four quarters.

VOLUME GROWTH

Analyst Alex Smith at broker Nomura expects sales volumes to grow 0.9 percent in 2009, with volume growth increasing throughout the year to 3.2 percent by the fourth-quarter helped by higher marketing spending and lower pricing.

Polman has said that with Unilever's scale and brand positions, strong research and development and top brands like Lipton tea and Sunsilk shampoo it should grow over one percent faster than its markets on a consistent basis.

Nomura's Smith highlights Unilever's strong brand concentration and category positions compared with its peers with half its sales coming from its top 13 brands, while 76 percent of Unilever's sales derive from categories where it is the global one or two compared to Nestle's figure of 70 percent.

Investors were alarmed in February when Polman abandoned financial targets on annual sales and margins, but he has settled nerves by stressing he wants to be judged on results rather than meeting targets.



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