The Investment Column: Unilever set to clean up in developing markets

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The Independent Online
Stodge has always been the word which sums up Unilever, and that is not just a reference to the food and detergent group's Cornetto ice creams or Birds Eye fish fingers.

Unilever's bureaucratic, Anglo-Dutch construction has, like Shell in the oil business, traditionally led to solid but unexciting returns for investors. Indeed, its shares have underperformed the rest of the market by nearly 10 per cent since the start of 1995, even after yesterday's 71.5p bounce in the price to 1,346.5p.

But things could be about to change. Analysts were pleasantly surprised by yesterday's 5 per cent rise in third-quarter pre-tax profits to pounds 826m. Although that fed into an apparently pedestrian 2 per cent increase to pounds 1.95bn in the nine months to September, the figures came in at the top end of expectations.

What wrong-footed observers was a much lower-than- expected pounds 32m exceptional charge and resilience in the face of a weak European ice-cream market, where Unilever is the market leader. Analysts reckon the profits impact was around pounds 50m, but the group held market share.

Despite the problems, margins managed to creep up in Europe from 11.4 per cent to 11.8 per cent. The businesses there, contributing 55 per cent of total operating profits, remain the backbone of the group and efforts to jazz up the performance appear to be having some effect. The frozen food business, restructured after the arrival of new management in 1994, saw margins and profits move forward, despite some residual effects from the BSE scare. The detergents operation also now seems to be bouncing back after last year's Persil Power debacle.

The figures were given a leg-up by this year's acquisitions, particularly in North America. Diversey, a maker of industrial cleaning products, and Helene Curtis, a shampoos and personal products group, added 11 points to the 18 per cent sales rise notched up by the North American division. But most of the rest of the increase was accounted for by encouragingly higher volumes and level profits were only held back by the launch of new scents from Calvin Klein and Elizabeth Arden.

Too much should not be read into one quarter's figures, but after disappointing the market all this year, the underlying trends in the core businesses at last look positive. Longer term, there is still plenty to go for at Unilever. Developing markets continue to storm ahead as the burgeoning middle classes demand Western consumer products. Thus sales growth put at 15 per cent in Brazil was fuelled by personal care and detergents, while India, China, Indonesia and the Philippines continue to be star performers.

The key to unlocking this value will depend on the management shake-up being instituted by Niall Fitzgerald, the new chairman of the British end of Unilever. If that results in a more performance-orientated culture at the group, the shares should start to reversetheir underperformance. In the meantime, profits of pounds 2.55bn this year, rising to pounds 2.75bn next year, would put the shares on a forward multiple of 15. This is one to lock away.

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