Evaluation of Shareholder Value and Market Evaluation of Equity for Unilever

MBA Course work: Corporate Finance 18th March 2011

Bradford University School of ManagementFull Time MBA 2010 – 11

Evaluation of Shareholder Value and Market Evaluation of Equity for

UB No: xxxxxxxxx

Module Name: Corporate FinanceModule Leader: Patrick Barber

Module Code: MAN4071M

I certify the word count does not exceed more than the number of words mentioned: 3500(Excluding References, Appendix, tables, name of graphs/figures/tables, figure captions, table captions, abbreviations)

UB: xxxxxxxxxx Page 1 of 44


Abbreviations:

BRIC: Brazil Russia India China

DCF: Discounted Cash Flow

EPS: Earnings per Share

EVA: Economic Value Added

FCF: Free Cash Flow

GBP: Great British Pound

MVA: Market Value Added

NOPAT: Net Operating Profit after Tax

NPV: Net Present Value

P/E: Price/Earning

PLC: Private Limited Company

SAV: Shareholders Value Analysis

TSR: Total Shareholders Reuters

UN: United Nations

USD: United States Dollar

Y-o-Y: Year-on-Year



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



Worst Case Scenario.....................................................................31

Discount factor:................................................................................32

Best Case Scenario:.......................................................................32

Worst Case Scenario:....................................................................33

Sales Revenue:.................................................................................34

Best Case Scenario........................................................................34

Worst Case Scenario:....................................................................35

Conclusion:..........................................................................................35

Reference:............................................................................................37

Appendix:.............................................................................................39

List of Figures:

Figure 1: Beauty and Personal Care Percentage Market Share...........6

Figure 2: Home Care Products Market Share.......................................7

Figure 3: Packaged Food Market Share................................................7

Figure 4: Global Home Care Market Share...........................................8

Figure 5: Key Finance Indicators..........................................................8

Figure 6: Financial Report.....................................................................9

Figure 7: Earnings per Share..............................................................10

Figure 8: Long Term Debt...................................................................10

Figure 9: SAV.......................................................................................11

Figure 10: Dividend Payout.................................................................13

Figure 11: TSR as %............................................................................14

Figure 12: EVA....................................................................................16

Figure 13: Unilever Time Series..........................................................17

Figure 14: Share Performance............................................................18

Figure 15: NAV per Share...................................................................21

Figure 16: P/E Value............................................................................22

Figure 17: Unilever's Dividend per Share...........................................28


Introduction:

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.

This course being with an objective of evaluation, followed by an

executive summary which gives a shorthand information on the

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.

0.15 0.21 0.21 0.21

6.58 6.47 6.33 6.31 6.37

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 1: Beauty and Personal Care Percentage Market Share (Source: Global Market Information Database)

1.05 1.07 1.17 1.26

14.94 14.63 15.15 15.7817.18

0

2

4

6

8

10

12

14

16

18

20

2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 2: Home Care Products Market Share (Source: Global Market Information Database)

0.01 0.01 0.02

1.72 1.66 1.68 1.69 1.65 1.64

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

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 6th 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%.

Figure 5: (Key Finance Indicators, Source: Unilever PDF)

Financial Report

39,642 40,187 40,523 39,82344,262

5,408 5,245 7,167 5,020 6,339

0

10,000

20,000

30,000

40,000

50,000

2006 2007 2008 2009 2010

E m

illi

on

s

Turnover Operating Profit

Figure 6: Financial Report (Source: Unilever website)

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.

Earnings per Share

1.191.32

1.79

1.21

1.46

00.20.40.60.8

11.21.41.61.8

2

2006 2007 2008 2009 2010

euro

Figure 7: Earnings per Share (Source: Unilever Annual Share)

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

7,289

9,9718,823

0

2,000

4,000

6,000

8,000

10,000

12,000

2008 2009 2010

E m

illi

on

Figure 8: Long Term Debt (Source: Unilever Annual report)

To maintain maximum flexibility in meeting the changing business

environment it is important to concentrate on cash., Unilever, for

raising capital, not only relies on shareholders funds but also on long

term debts. However, the long-term loans for Unilever are instituted

either by Unilever Finance International BV or by Unilever

Capital Corporation. This backward integration would help Unilever in

prospering markets as the profits is shared within the group, but

could also be lethal if there is no enough operating profit is generated.

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):

Figure 9: SAV (Source: Pike and Neale, 2009)

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.

Dividend + (Closing Share Price - Opening Share Price)TSR = ---------------------------------------------------------------------

Opening Share Price

Dividend + (Closing Share Price - Opening Share Price)TSR = ---------------------------------------------------------------------

Opening Share Price

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.

Total Shareholders Return Analysis:In general, it is considered that, higher the risk associated with an

investment, the greater are the returns. In addition, the firm that

delivers investment above the market rate would offset the risks that

are specific to it and to gain the market confidence it is essential to

have a consistent performance. Unilever aims to be among the top

three companies of the reference group, which include international

consumer goods companies.

TSR is calculated using the formula below.

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

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6G

PB

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

2006 2007 2008 2009 2010

Figure 10: Dividend Payout (Source: FT.com)

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.

Total Shareholder Value: Comparison AnalysisUnilever 2006 2007 2008 2009 2010Dividend Paid in p 460 490 550 640 700Dividend Growth in Percentage NA 7% 12% 14% 9%Share Price on 1st Feb 1327 1411 1715 1528 1913

Share Price on 31st Jan 1330 1390 1623 1389 1910Change in Share Price -3 21 92 139 3TSR in percentage 34.43858 36.21545 37.4344 50.98168 36.74856Colgate Palmolive Dividend Paid in p NA 0.19 0.78 1.23 1.51Dividend Growth in Percentage NA NA 310.5263 57.69231 22.76423Share Price on 1st Feb NA 69.5 77.368 63.4 79.55Share Price on 31st Jan NA 77.96 68.54 82.15 79.55Change in Share Price NA 8.46 -8.828 18.75 0TSR in percentage NA 12.44604 -10.4022 31.5142 1.898177Reckitt Benckiser Dividend Paid in p 0.21 0.5 0.62 0.92 1.07Dividend Growth in Percentage NA 138.0952 24 48.3871 16.30435Share Price on 1st Feb 1991 2485 2660 2671 3194Share Price on 31st Jan 1994 2612 2607 2694 3256Change in Share Price 3 127 -53 23 62TSR in percentage 0.161226 5.130785 -1.96917 0.895545 1.97464

TSR Graph

-20 -10 0 10 20 30 40 50 60

2006

2007

2008

2009

2010

TSR Percentage

Reckitt Benckiser

Colgate Palmolive

Unilever

Figure 11: TSR as %

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.

Market Value Added (MVA):MVA has become an important tool for financial managers to evaluate

their firm with the help of market value added in a manner that is

consistent with the evaluation by the capital markets (Young and

O’Byrne 2000). This evaluation is build on the primes that someone is

always right. Nevertheless, this method not only emphases on the

traditional accounting method but also the value added to the

shareholders.

Market Value AddedUnilever 2006 2007 2008 2009 2010Price as on 31 Jan 1330 1390 1623 1389 1910(*)Total Outstanding shares in m GBP 484 484 484 484 484(=) Market Capitalization (in m GBP) 643720 672760 785532 672276 924440(-) Shareholders equity 4,745 3888 5027 3370 4244(=) Market Value Added 638,975 668872 780505 668906 920196Colgate Palmolive Price as on 31 Jan 65.24 77.96 68.54 82.15 79.55(*)Total Outstanding shares in m GBP 188.0 509.0 262 354 325(=) Market Capitalization (in m GBP) 12265.12 39681.64 17957.48 29081.1 25853.75(-) Shareholders equity 517.8 1179.7 945.7 2017 2139.8(=) Market Value Added 11747.32 38501.94 17011.78 27064.1 23713.95Reckitt Benckiser Price as on 31 Jan 1994 2612 2607 2694 3256(*)Total Outstanding shares in m GBP 734.2 733.6 722.4 722.4 728.6(=) Market Capitalization (in m GBP) 1463995 1916163 1883297 1946146 2372322(-) Shareholders equity 1,866 2,385 3,294 4,014 4,325(=) Market Value Added 1462129 1913778 1880003 1942132 2367997

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.

EVA = NOPAT – (Ke * Invested Capital)EVA = NOPAT – (Ke * Invested Capital)

Economic Value added (EAV):EVA attempts to measure the economic profit added by the company

to the shareholder over the previous year.

EVA can be calculated using the formula below:

NOPAT= Net operating profit after taxKe = the rate of return required by the shareholdersInvested Capital = Net Assets or Shareholders fund

Economic Value AddedUnilever 2006 2007 2008 2009 2010NOPAT (in million Euros) 5015 4136 5285 3659 4244Ke 8 8 7.8 8 7.7Invested Capital 23188 23743 22342 25417 27561EVA 3159.96 2236.56 3542.324 1625.64 2121.803

Economic Value Added

3159.96

2236.56

3542.324

1625.64

2121.803

0

500

1000

1500

2000

2500

3000

3500

4000

2006 2007 2008 2009 2010

EV

A i

n m

Eu

ros

Figure 12: EVAThough the EVA remained positive, which mean Unilever has been

effectively making profit for its investor since 2006, it has been

declined since 2009. One reason being the NOPAT has been

decreasing however, investors return expectation remained the same,

in addition, the capital investment has also increased over the years,

which, therefore, declined the EVA.

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 PayoutDividend Payout

Unilever 2006 2007 2008 2009 2010Earnings Per Share (EPS) in P 115.00 128.00 173.00 117.00 146.00Dividend Per Share (DPS) in P 48.00 51.00 61.00 41.00 71.00Dividend Cover (EPS/DPS) 2.40 2.51 2.84 2.85 2.06Dividend Payout Ratio (DPS/EPS) in % 41.74 39.84 35.26 35.04 48.63Share Price as on Jan 31st in P 1330.00 1390.00 1623.00 1389.00 1910.00Dividend Yield (DPS/Share Price) 3.61 3.67 3.76 2.95 3.72Colgate Palmolive Earnings Per Share (EPS) in P 90.28 165.00 180.00 313.00 283.00Dividend Per Share (DPS) in P 45.87 72.24 76.75 123.15 133.34Dividend Cover (EPS/DPS) 1.97 2.28 2.35 2.54 2.12Dividend Payout Ratio (DPS/EPS) in % 50.81 43.78 42.64 39.35 47.12Share Price as on Jan 31st in P NA 7796.00 6854.00 8215.00 7955.00Dividend Yield (DPS/Share Price) NA 0.93 1.12 1.50 1.68Reckitt Benckiser Earnings Per Share (EPS) in P 93.50 127.90 154.70 194.70 213.80Dividend Per Share (DPS) in P 41.50 55.00 80.00 100.00 115.00Dividend Cover (EPS/DPS) 2.25 2.33 1.93 1.95 1.86Dividend Payout Ratio (DPS/EPS) in % 44.39 43.00 51.71 51.36 53.79Share Price as on Jan 31st in P 1994.00 2612.00 2607.00 2694.00 3256.00Dividend Yield (DPS/Share Price) 2.08 2.11 3.07 3.71 3.53

Unilever Times Series

020406080

100120140160180200

2006 2007 2008 2009 2010

Per

cen

tag

e Dividend Yield (DPS/SharePrice)

Dividend Payout Ration

Figure 13: Unilever Time Series

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.

Effective Market Hypotheses:EMH is primarily used to measure the efficiency of the capital market.

The seriousness of the information available on an organization

depends on the EMH of that market. EMH assumes that the market is

efficient in receiving and responding to the information available on a

company and investors are rational in making their decision on this

decisions. Fama (1970) indentified three forms of information

efficiency for stock markets.

1. Weak form

2. Semi-strong form

3. Strong form

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.

Share price movement:

Figure 14: Share Performance (Source: Ft.com)

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

NAV = [Fixed Assets + Current Assets] – [Current Liabilities + Long Term Debt]NAV = [Fixed Assets + Current Assets] – [Current Liabilities + Long Term Debt]

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.

Net Asset Value:NAV analysis is made on the value of assets and liabilities mentioned

in the balance sheet, however, these values are book values which are

financed both my equities and debts. NAV is calculated using the

below formula.

NAV’s formula can also be used to calculate shareholders equity.

14.311.78

4.61 4.95

19.06

10.48

0

5

10

15

20

25

2010 2009

NV

A/s

har

e

Unilever Colgate Palmolive P&G

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

Net Present Value (in million except per share)Unilever 2010 2009Fixed Assets 28683 26205Current Asset 12484 10811Current Liabilities 13606 11599long term debt 8823 9971NAV 18738 15446Avg no. of Outstanding share 1310.1 1310.1NAV per share 14.30 11.79Colgate Palmolive Fixed Assets 5432.6 5639Current Asset 2723 2934Current Liabilities 2721 2771long term debt 2055 2172NAV 3379.6 3630Avg no. of Outstanding share 733 733NAV per share 4.61 4.95P&G Fixed Assets 71870 80856Current Asset 12340 15684Current Liabilities 15953 51159long term debt 14033 14787NAV 54224 30594Avg no. of Outstanding share 2843.47 2917.03NAV per share 19.06 10.48

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.

Price/Earning Value (P/E):The P/E method values the company based on future performance

expectations. It indicates the market rating of the future earning

potential of the company (Healy and Palepu 2008). A high P/E ratio is

an indication of shareholders trust on the companies future prospects.

16295.4920604.29

55454.14

0

10000

20000

30000

40000

50000

60000

Unilever Colagate P&G

P/E Value

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

P/E Ratio Unilever Coalgate P&GEarnings per Share (in p) 146 283 241Share Price on 31st Jan/11 1816 7955 4700P/E Ratio 12.44 28.11 19.50No. of Share 1310.1 733 2843.5P/E Value 16295.49 20604.29 55454.15

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:

It is therefore clear that, the current P/E value of Unilever is under

valued, when compared with the fair P/E value.

Discounted cash flow:The DCF is perhaps the most widely used valuation method of

valuation. It not only focuses on profits but also on cash flows, which

are less easy to manipulate. DCF also uses the investor’s required

return as the basis for assessing the value of cash flows. The valuation

is performed by forecasting the cash flow that is generated by the

value drivers. The cash flow is calculated with forecasted revenue

and deducting all the cash based expenses that are incurred by the

business that includes tax and capital expenditure.

P/E time series Average = 15. 14 (calculated)

(LondonStockExchange.com)

P/E five year high = 20.10

P/E five year low = 9.55

Avg 5 year high/low = (20.10+9.55)/2 =14.82 (Source:

Returns.com)

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 3.6Sale Revenue in € m 44262

46519.36

48891.85

51385.33

54005.99

56760.29

59371.26

62102.34

64462.23

66782.87

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


46519.36

48891.85

51385.33

54005.99

56760.29

59371.26

62102.34

64462.23

66782.87

Operating cost % 85.7 85 85 85 85 85 85 85 85 85Operating Cost in m

37932.534

39541.46

41558.07

43677.53

45905.09

48246.25

50465.57

52786.99

54792.9

56765.44

Operating Margin (%) 14.3 15 15 15 15 15 15 15 15 15EBITDA in € m

6329.466

6977.904

7333.777

7707.8

8100.898

8514.044

8905.69

9315.351

9669.335

10017.43

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


46519.36

48891.85

51385.33

54005.99

56760.29

59371.26

62102.34

64462.23

66782.87

Operating 85.7 85 85 85 85 85 85 85 85 85

cost %Operating Cost in m

37932.534

39541.46

41558.07

43677.53

45905.09

48246.25

50465.57

52786.99

54792.9

56765.44

Operating Margin % 14.3 15 15 15 15 15 15 15 15 15EBITDA in € m

6329.466

6977.904

7333.777

7707.8

8100.898

8514.044

8905.69

9315.351

9669.335

10017.43

D&A as % 3.4 3.68 3.68 3.68 3.68 3.68 3.68 3.8 3.8 4

D&A in € m215.20

1844256.

7869269.883

283.647

298.113

313.3168

327.7294

353.9834

367.4347

400.6972

Other expenses as (%) 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1Other expenses in € m

449.392086

495.4312

520.6982

547.2538

575.1637

604.4971

632.304

661.3899

686.5228

711.2376

EBIT in € m5664.8

72076225.686

6543.196

6876.899

7227.621

7596.23

7945.656

8299.978

8615.377

8905.496

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)

EBIT in € m5664.

872076225.686

6543.196

6876.899

7227.621

7596.23

7945.656

8299.978

8615.377

8905.496

Tax in (%) 27 27 27 27 27 27 27 27 26 26

Tax Paid1529.

515461680.935

1766.663

1856.763

1951.458

2050.982

2145.327

2240.994

2239.998

2315.429

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

Net Earnings € m3871.

934394255

.254472.268

4700.354

4940.072

5192.015

5430.848

5673.027

5969.268

6170.28

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%.

Net Earnings € m3871

.934255

.254472

.264700

.354940

.075192

.015430

.845673

.025969

.266170

.28Investment in (%) 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9

Investment in € m1726

.211814

.251906

.782004

.022106

.232213

.652315

.472421

.992514

.022604

.53Net Earnings after investment € m

2145.71

2440.99

2565.48

2696.32

2833.83

2978.36

3115.36

3251.03

3455.24

3565.74

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.

Estimated working capital as (%) of revenue

0.0023 3 3 3 3 3 3 3 3 3

Working Capital € m 1.01 13961467

1542

1620

1703

1781

1863

1934

2003

Change is working capital € m NA1394.56

71.17

74.80

78.61

82.62

78.32

81.93

70.79

69.61

Free Cash Flows:FCF is the cash flow that is free of all financial obligations. It is the

cash available for disposal on strategic investment decisions which is

at the discretion of directors. Unilever has been efficient in generating

FCF; however, it claims that FCF is not used as a liquidity measure.

Although the average FCF for the past 5 year is € 3907 million (see

appendix 9), it is assumed that, its growth will be in line with the

growth of revenue.

Net Earnings after investment € m

2145.72

2441.00

2565.49

2696.33

2833.84

2978.36

3115.37

3251.04

3455.24

3565.75

Estimated working capital as (%) of revenue

0.0023 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Working Capital 1.021395.58

1466.76

1541.56

1620.18

1702.81

1781.14

1863.07

1933.87

2003.49

Change is working capital NA1394.56

71.17

74.80

78.62

82.63

78.33

81.93

70.80

69.62

Free Cash Flow (FCF)3365.00

3502.97

3681.62

3869.38

4066.72

4274.12

4492.10

4698.74

4914.88

5101.64

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

Gordon Growth Model:The GGM method is used as indicator of future dividend growth based

on the past dividends (Puxty et al 1988). GGM measure the difference

the difference in the dividends paid out by the firm to its investors,

therefore, this method is suitable for those firms that consistently pay

dividends. If there is inconsistency (or no growth) in the dividend

payout, GGM model may not be a suitable technique. GGM is build on

the assumption that the rate of growth in dividends is constant

indefinitely, which is not possible in highly competitive market

environment. Consider Unilever’s dividend payout graph below,

although there has be increasing growth in the dividend payout has

been increasing since 2006, there was a sudden drop in 2009. This

was due to the retention of earnings used as cash for acquisition

purpose. Therefore, GGM cannot realistic value of future equity.

Unilever's Dividend per share

71

41

48

6151

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010

in

p

Figure 17: Unilever's Dividend per Share (Source: Unilever Annual Report, 2010, 2009, 2008, 2007, 2006)

Capital Asset Pricing Model: In contrast to GGM, CAPM does not require growth projections, nor

does it depend on the instantaneously efficiency of the market (Pike

and Neale 2009). This is because, CAPM considers Market Risk

Factors in calculation and is not based on the past performance of

company and on the dividend payout history.

CAPM considers the following:

RF : Market Risk Free Rate, usually government stocks

ERM : Expected return on the overall market

β : Beta Value, market risk of individual security

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 Unilev

er

P&G Colgate

Palmolive

Reuters.c

om

.66 0.51

87

0.4892

Capital Asset Pricing Model (Cost of Equity, KE = RF+ β*(ERM-RF))

Company Risk Free

Rate(RF)

Beta(

β)

Equity Risk

Premium

Cost of

Equity

Unilever 3.7% .66 4.5% 6.67%

Colgate-

Palmolive

3.7% .518

7

4.5% 6.03%

P&G 3.7% .489

2

4.5% 5.90%

Free Cash Flow (FCF) and Net Present Value:Prudently, the forecast of free cash flow for the next 10 years is

discounted at a rate of 8%, to find the Net Present Value of €

26145.13 million

Terminal Value:In the current economic conditions and putative continuous narrowing

margins is certainly a concern for Unilever. However, with the current

performance and brand recognition there is certainly no end in the

near future. Nevertheless, terminal values are calculated to determine

the value of the company at the end of the 10th year. IMF has

forecasted 8.0% growth rate for India, and 9.8% growth for China,

which are big markets for Unilever, and 2.6% growth rate for the U.K

(bbc.com). Assuming Unilever will also grow by the same rate, the

terminal values are calculated.Final Year FCF * (1+Longterm Cash flow growth rate)Terminal Value =

------------------------------------------------------------------(Discounted Factor-Long term cash flow growth rate)

Terminal Value = 5101.64*(1+2.6%)/(8%-2.6%) =

€ 96648 million

Discounted Terminal Value = Terminal Value x (1+

Ke)^10

= 48465.6*0.5000 = € 48323.8

million

Enterprise Value:

Sensitivity Analysis: Pike and Neale (2009) mention that the sensitivity analysis is used to

isolate and assess the potential impact of risk on a firms value.

There are different factors which may affect the valuation of the

company. The different factors are as follows:-

Long term growth rate

Discount factor

Sales Revenue

Long Term Growth Rate:

Best Case ScenarioAssuming the current economic downturn will completely end after

2020, also assuming that the growth rate will be over 7.5% (at the

least), will boots the growth rate of Unilever, which is 3.6% in the

final year, to 4.8% after that.

Worst Case ScenarioAssuming that the long term growth has reduced from 3.6% to 2%.

Discount factor:

Best Case Scenario:As a best case scenario, it is assumed that the cost of equity is

discounted at 7.00%

Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%

g = growth rate after final year = 4.8%

Present Value at 10th year = 5101.64/(0.08-0.048) =€159426 m

Terminal Value = 159426*0.5000 =€79713 m

Enterprise Value (€ million) = NPV + Terminal Value= 26145.13+79713 = €105858 m

Debt (€ million) = 11753.79

Entity Value (€ million) = Enterprise Value – Debts



Present Value at 10th year = 5101.64/(0.08-0.048) =€ 115946 m

Terminal Value = 115946*0.5000 =€ 57973 m

Enterprise Value (€ million) = NPV + Terminal Value= 26145.13+57973 = € 84118 m

Debt (€ million) = 11753.79

Entity Value (€ million) = Enterprise Value – Debts

Worst Case Scenario:Assuming that the discounted was peculiarly 2 percentage point

higher (at 10%) than the usual 8%




Terminal Value = 159426*0.5000 =€ 79713 m

Enterprise Value (€ million) = NPV + Terminal Value= 27352.80+79713 = € 107065

mDebt (€ million) = 11753.79

Sales Revenue:

Best Case ScenarioAssuming that an optimistic economy has boots the sales of Unilever

on an average of 8% increase for the next 10 years.


g = growth rate after final year =3.6%


Terminal Value = 115946*0.5000 =€ 57973 m

Enterprise Value (€ million) = NPV + Terminal Value= 23969+57973 = €

81942 mDebt (€ million) = 11753.79

Worst Case Scenario:Assuming that the underlying sales will grow at only 3% which is a

drop of 25% of 2010 sales.




Terminal Value = 159426*0.5000 =€ 79713 m


108899 mDebt (€ million) = 11753.79

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




Terminal Value = 115946*0.5000 =€ 57973 m


82308 mDebt (€ million) = 11753.79

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’.

Strong Buy Hold 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.

Puxty,A.G., Dodds,J.C., and Wilson,M.S. (1988).’Financial management: method and meaning’.VNR Series,pp 95.

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]

BBC.com (2010). “Market Data” http://news.bbc.co.uk/news/business/market_data/gilt/default.stm [Accessed on 14.03.2011]

CNNMoney.com (2010), Fortune Global 500, http://money.cnn.com/magazines/fortune/global500/2010/snapshots/6127.html [Accessed on 10.03.2011]

Damodaran (2010),’Country default spreads and Risk premiums’. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html [Accessed on 14.03.2011]

Ft.com (2011), Unilever PLC, http://markets.ft.com/tearsheets/performance.asp?s=uk:ULVR [Accessed on 11.03.2011]

Global Market Information Database [ND], https://www.portal.euromonitor.com/Portal/Magazines/Companies.aspx [Accessed on 13.03.2011]

HMRC.gov.uk (ND), Corporation Tax Rates, http://www.hmrc.gov.uk/rates/corp.htm [Accessed on 10.03.2011]

LondonStockExchange, (2011), Unilever PLC, http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B10RZP78GBGBXSET1 [13.03.2011]

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B10RZP78GBGBXSET1

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B10RZP78GBGBXSET1

http://www.hmrc.gov.uk/rates/corp.htm

https://www.portal.euromonitor.com/Portal/Magazines/Companies.aspx

http://markets.ft.com/tearsheets/performance.asp?s=uk:ULVR

http://markets.ft.com/tearsheets/performance.asp?s=uk:ULVR

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

http://money.cnn.com/magazines/fortune/global500/2010/snapshots/6127.html

http://news.bbc.co.uk/news/business/market_data/gilt/default.stm

http://www.bankofengland.co.uk/publications/fsr/2010/fsr28.htm

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/AnnualReportandAccounts2010/Winningthroughcontinuousimprovement.aspx [07.03.2011]

http://www.unilever.com/investorrelations/annual_reports/AnnualReportandAccounts2010/Winningthroughcontinuousimprovement.aspx

http://www.unilever.com/investorrelations/annual_reports/AnnualReportandAccounts2010/Winningthroughcontinuousimprovement.aspx

http://www.reuters.com/finance/stocks/financialHighlights?symbol=UL.N

http://www.reuters.com/finance/stocks/financialHighlights?symbol=UL.N

Appendix:

Appendix 1: Currency Conversions

International Currency1 USD 2006 2007 2008 2009 20101 GBP 0.367 0.514 0.492 0.716 0.6571 Euro 0.82 0.75 0.634 0.77 0.73

Appendix 2: Historic Long-Term Debts as percentage of total revenue

of Unilever

Unilever 2010 2009 2008 2007 2006Revenue € million)

44262 39823 40523 40187 39642

Long Term debts € million)

8003 8823 7289 5851 6183

% of revenue 18.08097239 22.15554 17.98732 14.55943 15.59709Average 17.67607103

Appendix 3: Historic Annual Incremental of Revenue of Unilever

Unilever 2010 2009 2008 2007 2006Revenue € million 44262 39823 40523 40187 39642

% increase 4.1% -1.7% .8% 1.4% 3.23%

Appendix 4: Historic Annual Increment of Operating Margin of

Unilever

Unilever 2010 2009 2008 2007 2006Operating Margin as (%) 14.3 12.6 17.7 13.1 13.6

Appendix 5: Historic Depreciation of Unilever

Unilever 2010 2009 2008Depreciation % 3.43 3.81 3.78

Average Depreciation for 3 years 3.68

Appendix 6: Historic interest paid as percentage of Profit After Tax of

Unilever.

In € m 2010 2009 2008 2007 2006

Profit After tax 4598 3659 5285 4136 5015

Interest paid 354 289 258 248 270% of Interest 7.699 7.898333 4.881741 5.996132 5.383848Avg Interest 6.37

Appendix 7: Historic capital expenditure of as percentage of revenue.

2010 2009 2008 2007 2006Revenue € million 44262 39823 40523 40187 39642

Capital Expenditure € million 1701 1258 1099 983 934Capital Expenditure as %

Revenue 3.843026 3.158978 2.71204 2.446065 2.356087Average 2.90323916

Appendix 8: Historic change in working capital.

Unilever

Sales Revenue

Current Assets

Current Liabilities

Working Capital

Working capital as % of total revenue

2006 39642 9501 11516 -2015 5.0829927852007 40187 9928 10924 -996 2.4784134172008 40523 11175 11970 -795 1.9618488272009 39823 10811 12881 -2070 5.1980011552010 44262 12484 12483 1 0.002259274

Average 2.943799382

Appendix 9: Historic free cash flow of Unilever.

Free Cash Flow in million GBP

2006 42222007 37692008 3236

2009 49412010 3365Average for 5 years

3906.6

Evaluation of Shareholder Value and Market Evaluation of Equity for Unilever

Documents

term credit

sara lees

current economic

worst case

key finance

free cash

revenue sale

opening share