Unilever's quality is hard to beat, buy in
BTG; Millennium & Copthorne
Friday 06 November 2009
Our view: Buy
Share price: 1794p (-35p)
Paul Polman, chief executive of Unilever, has every reason to be cheerful. Since he took over in January – after stints at Nestlé and Proctor & Gamble – efforts to turn around the underperforming behemoth have made considerable progress. Unilever is a consumer giant. It is the third biggest food and consumer goods company in the world, with 400 brands, covering a slew of household names from Sunsilk shampoo to Ben & Jerry's ice-cream to Persil washing powder.
The Anglo-Dutch group is brutally exposed to consumer confidence, which tanked this year as recession knocked the stuffing out of economies from Australia to Iceland. Against such a background, yesterday's third-quarter results came in stronger than expected. Underlying volume sales across the whole group rose by 3.6 per cent – the new chief executive's second consecutive quarter of growth – and the trend should continue to meet the objective of restoring volume growth for the year without cutting margins or eating into cash flow.
Mr Polman said: "Market conditions remain challenging, and in this environment we will continue to increase investment behind our brands and build long-term capabilities in research and development."
Some of the growth can be put down to price cuts. In Western Europe, for example, which was hit particularly hard by the global recession, prices were cut by 2.3 per cent to help push sales volumes up by 2.6 per cent. Falling commodity prices have also helped. But stock-watchers still have much to say in the company's favour. Martin Deboo at Investec said: "Unilever has posted a strong [set of results] that further testifies to the strength of its recovery under Paul Polman."
We think he's right. The price-to-earnings ratio estimate of 14.8 times for 2010 is not the cheapest but, the prospective yield of 5.9 per cent, is excellent. Unilever is worth buying.
Our view: Buy
Share price: 183.2p (-9.8p)
"It's all about security with a sizzle," says BTG's chief executive, Louise Makin, when asked about the investment case for the biotechnology group. Unlike most companies in the sector, BTG has had a good recession: and investors that backed the stock 12 months ago have seen the shares vault by more than 50 per cent.
That's the security. The sizzle comes from the group's acquisition last year of Protherics, another biotech firm. The shares fell by 5 per cent yesterday after BTG published its half-year report, with some analysts blaming manufacturing delays. But Ms Makin disagrees with the doomsayers, saying that the falls were just down to profit-taking. She points to the benefits from the acquisition which has served to diversify the company's base and should pay dividends long-term.
Regardless of yesterday's fall BTG is one of the strongest performers in the biotechnology sector, and with a number of potential treatments in the pipeline there is enough to keep investors interested: Despite its size – the group has a market capitalisation of nearly £500m – the share price, like many others in the industry, is still largely driven by newsflow.
It is the shares going up that investors need to rely on – there is no dividend. But while the shares are not cheap (they trade on 88 times next year's earnings), BTG is profitable, and analysts say it trades at a premium on virtually every metric.
But yesterday's half-year report beat expectations, something that the group has done before. In our opinion it will happen again. Treat yesterday's share price fall as a buying opportunity.
Millennium & Copthorne
Our view: Take profits
Share price: 363.4p (+11.4p)
An unusual note was sounded by Millennium & Copthorne's chairman, Kwek Leng Beng: it was one of optimism. While all the numbers showed falls (third-quarter revenue down to £160.4m from £173.9m, pre-tax profits down to £22m from £30m) the rate of decline is slowing, and this continued through October. Mr Leng Beng said that while conditions remain tough, "the industry is moving in the right direction". And if it is, the hotel operator's earnings will turn around rapidly. It is strongly operationally geared, meaning that as occupancy rates grow, earnings grow far greater than costs. The company has kept a lid on those during the downturn, so enters a recovery in decent shape. Trouble is, the shares reflect that. They trade on 19.4 times this year's earnings, with a prospective yield of just 1.8 per cent, according to Evolution Securities. They're buyers, but that's too rich for our blood, given that the world economy is only just off the critical list. We bought at 270.5p in May. Now take profits.
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