Investment Column: Unilever's quality makes it worth buying
Tuesday 20 July 2010
Our view: Buy
Share price: 1892p (+10p)
The consumer goods giant Unilever agreed yesterday to sell its Italian frozen foods business to Birds Eye Iglo, which is owned by the private equity firm Permira, for €805m (£685m).
The sale of Findus Italy, which is expected to clear in the fourth quarter, will complete Unilever's exit from its frozen food operations in Europe. The maker of an enviable portfolio of big brands had previously sold its Birds Eye and Iglo operations in eastern Europe to Permira in 2006. However, Unilever's strategy in coming years will increasingly be centred on the emerging markets of Brazil, Russia, India and China, as well as Mexico, Indonesia, South Africa and Turkey.
A rising population and growing wealth in many of these countries bodes well for Unilever's arsenal of food, personal care and home care products which range from PG Tips tea and Sure deodorant to Persil washing powder. Analysts at Goldman Sachs forecast that Unilever's growth potential from emerging markets should contribute to a further rise in earnings per share and underlying margins at the company by 2012.
While the case for its shares being undervalued is less compelling than it was in November when we said buy at £17.94, we still believe Unilever's stock has legs at a relatively undemanding 2011 price to forecast earnings of 10.7.
There are risks, of course. For instance, Unilever still faces a challenging consumer environment in Europe and there are fears that input costs could rise beyond expectations. And the company's attempt to acquire Sara Lee's personal care brands and laundry business in Europe for £1.1bn could also face further regulatory delays ahead that could put back the target of clearance in the fourth quarter. Then there's the euro – if the single currency strengthens that's bad news.
However, as the global economy recovers, we think Unilever is by no means overpriced and should reap the rewards. Buy.
Our view: Sell
Share price: 33.5p (-4.5p)
There was horrible news from UK Coal yesterday when it warned that its half-year losses were rising sharply. Coal prices may be going up, but the company has been battered by the costs of refinancing its growing debt mountain, which wiped another hefty chunk from the share price as it told investors that first-half, pre-tax losses would come in at £94m against £81.5m.
With UK Coal it seems that, just as one thing appears to have turned around and started working in its favour, another comes along to bite it – and hard – as can be seen by what can only be described as a profits warning. The last time we looked at UK Coal, its shares were trading at just above 90p and we felt it would be worth a bet, given the planned production increases and expectations that world coal prices would rise.
That doesn't look such good advice now. Given Britain's energy issues, UK Coal really ought to have something going for it in the long term but the performance of the shares speaks for itself. Speculative investors might see a chance of a bounce-back, but sometimes you have to cut your losses. Sell.
Our view: sell
Share price: 226.1p (-29.9p)
Aquarius Platinum had a torrid day yesterday, with its shares taking a nasty tumble. It followed an announcement on Friday by South Africa's principle inspector of mines that Aquarius needed to alter the way in which its mineshafts were built.
On the face of it, the news may sound a little pointy-headed, but according to analysts at Panmure Gordon, the move could reduce Aquarius's reserves and production at its Kroondal and Marikana mines by between 8 and 10 per cent, with unit cash costs rising by a similar figure, cutting 2011 earnings before interest, taxes, depreciation, and amortisation by 23 per cent.
Most investors would find that pretty easy to understand. Despite being listed in London, Aquarius is effectively a South African company and is the world's fourth-biggest primary platinum producer. Of course, when platinum prices are going north, often buoyed by confident markets, shares in Aquarius are a great buy.
But platinum prices have sunk recently, dragging down Aquarius's shares by nearly 40 per cent in six months. Yesterday, it said estimates of losses because of regulatory changes were, "way too high". Maybe Aquarius is right, but the direction of platinum prices is a more serious issue.
With Western economies seemingly threatened again, and China's growth beginning to slow, we see little scope for share price growth. A feeble yield of just 0.5 per cent, or thereabouts, provides no safety net, so sell.
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