SHARES: No quick fix from Unilever

A tired portfolio of household names is being reformed. But improvement will take time

Shares in Anglo-Dutch consumer products giant Unilever have suffered a pasting over the past couple of weeks. Many feel the declines are justified, after over-eager investors ramped up the stock to unsustainable highs, following Niall Fitzgerald's elevation to chairman in September.

Mr Fitzgerald has offered investors much, and he may deliver on his promises - but even if he does, argue the pessimists, it will be many years before the benefits are captured in the bottom line. In direct contrast to his predecessor, Sir Michael Perry - who is a reserved, diffident man - Mr Fitzgerald, given his Irish blood, is an eloquent, genial spokesman for the company.

On Friday, he will reveal the company's third-quarter figures. They may offer the optimists some solace, but it is clear that quick-fix solutions are unlikely to win over Unilever's bureaucracy. Nor does the adverse summer bode well for ice-cream sales - where its Walls brand leads the way.

The overhaul being contemplated by the company, however, should lead to some major changes. About 20 per cent of annual sales are now subject to a critical review. Of these, somewhat less than half may be disposed of, where returns do not match the company's new stated target: minimum earnings per share growth of 10 per cent a year.

A laudable cause, it is one which few Unilever shareholders would quibble with. From 1991 to 1995, growth in earnings per share has bumped along at a meagre annual compound rate of 6 per cent.

The worst performers would seem to be culinary and frozen foods, where reported margins are 4.9 per cent. Oil and dairy-based foods are also suffering, with below-average margins of 6.1 per cent, against overall margins of 8.8 per cent, excluding exceptionals.

Perhaps it is the slightly old-fashioned ring to some of Unilever's products, harking back as they do to the 1950s and beyond, that has prompted the marketing men's revamp. Margarine, once a staple of the revolution in mass-market shopping, has lost any cachet it may have once had. Unilever has "I Can't Believe It's Not Butter!" as its contender in the new spreads war, which has made valuable strides.

Another weapon in Mr Fitzgerald's armoury is a value creation model. With this, the company examines not just the traditional measure of retailing performance - margins - but also the return after tax and after the cost of capital. In this scenario, margins can be slim, but products where less capital is needed, or where it has been all but depreciated, can still be generating handsome returns for shareholders. So the decision as to what is up for grabs, and what is to be retained, is not quite as cut and dried as it may at first appear.

Mr Fitzgerald and his team have also selected a clutch of so-called starred category products. These are ones where Unilever has a global reach, and can hope to generate strong sales growth. Among these are laundry products, skin creams, ice-cream, and yellow fats.

However the portfolio is refined, it will not be a one-off project. As Mr Fitzgerald's co-chairman at the Dutch arm of the business, Morris Tabaksblat, has said: "We want to have clarity within two years. But by that time another 20 per cent, which is not showing good returns, will have to be looked at again."

There might also be some merit in a cautionary stance: the last radical manoeuvre by the group was its ill-fated introduction of Persil Power, which came unstuck when tests proved it actually damaged fabrics.

The final thrust of Unilever's grand design to take it into the next century is its expansion into developing markets. As the company is proud to boast, it has been active in most such territories for a long time. It was in South Africa in 1904, Brazil in 1928, and had a long-standing presence in Shanghai until the Maoist revolution swept away all evidence of Western business.

Its return to China paints a compelling picture of its overseas ambitions. Since it returned to the mainland, it has established 12 joint ventures with local partners, including two ice-cream factories, and a detergents plant. In 1994, sales tripled; last year, they doubled.

Turnover in China is expected to reach $1bn (pounds 660m) a year, within the next three years.

It has also invested across Eastern and Central Europe, and has embarked on developing a presence in Russia, where it now employs 1,000, up from only a handful a few years ago.

Unilever is rightly proud of the quality of its management, both at a local level and at senior level. While its reforms are not so far-reaching as those seen at some other multinationals, interest in the shares has been waning in recent years. The new proposals will inject some life back into the shares, which have underperformed the market over the past two years. On balance, management should be given the benefit of the doubt. However, for those looking to buy into the stock, there are other opportunities, where the downside is also limited, that would prove a more rewarding ride.

Unilever

Share price 1,284.5p

Prospective p/e 15.7*

Gross dividend yield 2.6%

Year to 31 Dec 1993 1994 1995 1996* 1997*

Turnover (pounds bn) 27.863 29.666 31.516 33.70 35.10

Pre-tax profits (pounds bn) 1.927 2.383 2.319 2.466 2.70

Earnings p/s (p) 69.5 83.6 78.6 81.6 89.3

Dividend p/s (p) 25 26.8 29.4 31.8 34

*Merrill Lynch forecasts