Interactive Investor

Terry Smith and analysts let rip at Unilever

20th January 2022 15:29

Graeme Evans from interactive investor

A failed attempt to buy high-growth businesses from GlaxoSmithKline has upset the Fundsmith owner. There’s also plenty going on at mid-caps Premier Foods and Superdry.

A new attack by top Unilever (LSE:ULVR) shareholder Terry Smith describing this week's £50 billion M&A action as a “near-death experience” kept up pressure on boss Alan Jope today.

Even though Unilever's chief executive last night pledged not to improve his offer for the consumer healthcare arm of GlaxoSmithKline (LSE:GSK), shares are still 6% below where they were before Monday's confirmation of a bid.

Fundsmith founder Smith urged management to focus on improving the existing Marmite-to-Dove soap business rather than targeting big acquisitions.

In a letter seen today by the Financial Times, he told investors: “It now appears that Unilever’s attempt to purchase the GSK consumer business is now thankfully dead rather than the value of our investment in Unilever.”

The criticism echoes comments made last week when Smith said management were focusing too much on burnishing Unilever's sustainability credentials. Jope will have an opportunity to redress the balance when Unilever publishes annual results on 10 February.

But analysts at UBS said the bid exposed “structural challenges” that they fear may stand in the way of multi-year targets for 3-5% underlying sales growth alongside margin expansion.

They described the failure to land Glaxo's consumer healthcare arm as a “double whammy” because it deprived Unilever of owning a large, higher margin business and postponed its own disposal of lower growth brands and businesses.

UBS has a “sell” recommendation on Unilever, with the Swiss bank favouring London-listed Nurofen and Air Wick firm Reckitt Benckiser (LSE:RKT).

Berenberg agrees after today raising its price target on Reckitt to 7,525p and lowering Unilever by 300p to 4,100p. Unilever shares were today 20p higher at 3,695p, while GlaxoSmithKline fell 25.4p to 1,641p as it presses ahead with plans to spin-off the Pfizer-backed consumer healthcare venture, which owns brands including Panadol and Aquafresh.

Other widely held stocks under pressure today included BP (LSE:BP.) and Royal Dutch Shell (LSE:RDSB) as this week's oil price rally ran out of steam. Royal Mail (LSE:RMG) also fell 2.5%, but the biggest decline came from Lloyds Banking Group (LSE:LLOY) as its recent recovery skidded to a halt with a decline of 3% or 1.7p to 52.2p. NatWest (LSE:NWG) eased 5.9p to 243.7p.

Support for China's economy after a cut in lending rates boosted shares in Hong Kong-based Prudential (LSE:PRU) by 36.5p 1,323p and luxury goods group Burberry (LSE:BRBY) improved 39.5p to 1,906p.

In the FTSE 250 index, shares in Premier Foods (LSE:PFD) jumped 7% after it upgraded expectations for 2021/22 adjusted profits to at least £125 million following a strong Christmas quarter. This figure would represent growth of 8.4% on last year, despite tough pandemic-era comparatives and a rising cost environment.

Jefferies said the beat by the Bisto and Mr Kipling firm was its seventh quarter in a row and a further signal of Premier's rising quality. At a price of less than 10 times earnings, it predicted Premier will attract “new friends” in a market pivoting to value.

Shares rose 7.4p to 117.4p but Jefferies has a price target of 130p and Peel Hunt is at 145p.

The stock was below 20p at the start of the pandemic, but capitalised on the stay-at-home cooking trends to retire expensive debt and then ramp up investment.

House broker Shore Capital said: “Premier is a stock that has been remarkably successful for shareholders since the start of 2020. We sense that the magnitude of the appreciation has meant that some shareholders feel that the equity story has travelled and arrived.

“However, we beg to differ. Rarely have we seen a Premier Foods management team so confident in its capabilities and excited about its prospects.”

Superdry is not as far as Premier Foods on the recovery path, but co-founder and chief executive Julian Dunkerton is pleased with strategic progress after narrowing half-year losses today.

Highlights included a 12 percentage-point increase in the full-price sales mix, which helped to drive the gross margin up by 3.5 points year-on-year. The new management team has just presented its first autumn/winter range and opened a flagship store in London's Oxford Street.

Dunkerton expects to deliver on current full-year expectations, but shares fell 24p to 225p on fears over the ongoing impact of inflationary pressures. Peel Hunt has a price target of 375p and believes the Superdry (LSE:SDRY) brand is “alive and well” with steadily increasing traction going into spring/summer as Covid restrictions ease.

The broker said a valuation of 5.2 times 2023 underlying earnings was “materially” below the medium-term potential of the business.

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