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Investors’ Chronicle: Unilever, S4 Capital, Boohoo

BUY: Unilever (ULVR)

Share buybacks will start this month and be completed by the end of the year as Unilever’s underlying sales rose by 6 per cent in the first quarter, beating analysts’ expectations, writes Nilushi Karunaratne.

Following “a good start to the year”, Unilever has announced plans to repurchase up to €3bn (£2.6bn)-worth of shares in 2021. The consumer goods giant will start buying back shares this month, and will complete the programme in one or more tranches by the end of the year.

This is Unilever’s first buyback programme since 2018, and chief financial officer Graeme Pitkethly says the decision reflects “the strength of our balance sheet, our leverage levels and the confidence that we have in our outlook and our cash flows going forward”. It also comes after a strong first-quarter performance that beat market expectations.

The three months to March 31 saw total sales dip by 1 per cent year on year, to €12.3bn, amid an 8 per cent knock from currency fluctuations. But on an underlying basis, sales rose by 6 per cent, coming in ahead of company-compiled analyst consensus of 4 per cent growth.

Demand for deodorant and hair styling products remains subdued as consumers stay at home, but Unilever has benefited from people continuing to stock up on surface cleaners and food. The ‘“foods and refreshment” business — which encompasses brands such as Magnum ice cream and Marmite — saw underlying sales climb by a tenth.

Looking ahead, the group remains cautious about volatile trading conditions arising from the pandemic. Yet even as Covid-19 cases surge in India, Pitkethly still anticipates “good growth” from the country in the second quarter.

Overall, Unilever is confident of meeting its full year target of 3 to 5 per cent underlying sales growth, and says that the first half will be towards the top end of this range. Its full year underlying operating profit margin is expected to rise “slightly” from the 18.5 per cent seen last year, although first half profitability will be weighed down by higher raw material, supply chain and freight costs, and increased spending on marketing.

BUY: S4 Capital (SFOR)

The company predicts 35 per cent growth in like-for-like revenues and gross profit in 2021 and plans a bond issue to underpin a war chest for M&A, writes Nilushi Karunaratne.

Amid a rebound in demand for advertising, S4 Capital, the digital agency chaired by Sir Martin Sorrell, has upgraded its full-year earnings guidance.

The improved outlook follows a bumper first quarter, in which like-for-like revenues jumped by 35 per cent year on year, to £122m, and gross profits climbed by a third, to £104m. This was aided by accounts secured with confectionary giant Mondelez and carmaker BMW which chief financial officer Peter Rademaker says started to have a “significant positive impact in March”.

There is likely to be further momentum to come as the group continues its M&A spree. S4 is prepared to stretch its net debt to around two times cash profits (Ebitda) and is planning to issue long-term bonds. When combined with the cash on its balance sheet and its usual 50:50 cash and equity deal structure, the group says it will have £500m of “transaction firepower”. Broker Peel Hunt estimates the bond issue will be between £250m and £300m.

Market conditions appear favourable for sustained organic growth. S4 says that new business activity is “frenetic” and the pipeline is “significantly” ahead of this time last year. As the global economy recovers and the pandemic drives consumers online, spending on digital advertising is expected to grow by a fifth in 2021 and 2022.

Digital marketing expenditure is correlated to global GDP, and while Sorrell is “extremely optimistic” about this year and the next, he has cautioned that the economic rebound may slow in 2023 as governments look to address their national debt piles.

HOLD: Boohoo (BOO)

In its largest market, the UK, sales climbed 39 per cent to £945m. The group is guiding that total sales will rise by a quarter this year, buoyed by acquisitions, writes Nilushi Karunaratne.

Fast-fashion retailer Boohoo has been a big beneficiary of the pandemic-driven closure of the high street and consumers flocking online — its adjusted cash profits (Ebitda) jumped by 37 per cent in the year to February 28 to £174m. There was a slight 0.2 percentage point contraction in the margin to 10 per cent, which reflects higher overseas distribution costs and investment in acquisitions.

The group saw sales growth across all of its geographic regions, and the number of “active” customers — those who have shopped on Boohoo’s website in the past 12 months — increased by 28 per cent to 18m.

The majority of Boohoo’s revenue comes from the UK, where sales jumped by close to two-fifths to £945m. While traditional core categories such as dresses and “going out” clothing experienced declines as people stayed at home, Boohoo responded by increasing its offering of activewear and loungewear.

Boohoo accepted all of the recommendations of an independent review of its UK supply chain, which identified “many failings”. The group is investing over £10m in supply chain monitoring and compliance measures, and former judge Sir Brian Leveson is overseeing an Agenda for Change programme, which has seen it sever ties with suppliers who were “unable or unwilling to demonstrate the required level of transparency”.

As it looks to move past this scandal, Boohoo is investing in future growth. Having raised £196m from a placing last May to help fund M&A, it spent over £250m on acquisitions last year. The group has been capitalising on the struggles of high-street retailers, purchasing Debenhams’ online business for £55m, and snapping up the brands and inventory of Dorothy Perkins, Wallis and Burton from the remnants of the fallen Arcadia empire for £25m.

Despite this spending, Boohoo has increased its net cash position (excluding lease liabilities) by 15 per cent to £276m, and it also has no long- or short-term borrowings.

Trading in the first few weeks of the current financial year has been described as “encouraging”, although the group remains cautious about an uncertain economic outlook. It is guiding that full-year revenue will rise by a quarter — in line with its medium-term target — with newly acquired businesses comprising five percentage points of this growth.

However, acquisitions are expected to dilute margins and, as such, the group is forecasting an adjusted cash profit margin of between 9.5 and 10 per cent. Still, house broker Jefferies forecasts adjusted cash profits will rise to £214m in 2022 and £270m in 2023.

The fact that sales momentum will slow this year was likely behind the 3 per cent dip in Boohoo’s share price, but 25 per cent growth is still nothing to be scoffed at. Lingering ethical concerns and a lofty forward price/earnings multiple of 30 keep us from upgrading our rating, but Boohoo looks set to continue as an ecommerce fashion winner.

Chris Dillow: Biden goes back to the 50s

Is what’s good for workers also good for shareholders? The fate of the US economy and stock market rests upon this question.

“It’s time to grow the economy from the bottom up,” says President Joe Biden. On top of the recent stimulus package, he’s proposing stronger trades union rights; increased tax credits for the low paid; a higher minimum wage; and the creation of lower-skilled jobs to improve infrastructure and to fight climate change financed by higher taxes on the well-off.

To investors used to decades of pro-rich policies, this seems scary. But it need not be so bad. Economists have shown that worker-friendly measures like these can actually boost profit rates. Because workers tend to spend more of their income than billionaires, transferring cash to them can boost demand. Better still, the assurance of high demand can encourage companies to invest more. And the prospect of rising wages should incentivise them to invest in labour-saving technologies — things that can boost productivity.

The profit rate, remember, is equal to the share of profits in GDP, multiplied by the ratio of GDP to the capital stock. If the latter rises enough, it can raise the profit rate even if profit margins are squeezed. It’s possible therefore that policies that seem hostile to owners of capital can actually help them. As John Kay wrote in his lovely bookObliquity, objectives are sometimes best achieved by aiming for something else.

In the 1950s and 60s the US had full employment policies, strong unions and high taxes on the rich; the top rate of income tax was over 90 per cent in the 1950s. And equities did well, with the S&P 500 delivering a real total return of 9.1 per cent a year between 1952 and 1972, which is even better than it has done in the last 20 years.

And as those policies ended in the 1980s, profit rates actually fell — in part because lower wage shares lead to lower growth.

None of this, however, guarantees that wage-led growth will work today. One danger is that investment depends upon animal spirits. And the end of pro-rich policies might weaken these, if only because such a big policy shift creates uncertainty; bosses’ perceptions of the right climate for investment have changed since the 1950s, and perceptions determine reality. Also, poorer households are more heavily indebted now than they were then — which means they might use some of their higher incomes to pay off debt and so demand won’t rise much. There’s also the danger that higher inflation — or fears thereof — will lead the Fed to raise interest rates or Biden to reverse his fiscal largesse.

There’s another difference between now and the 50s. Then there was a backlog of new technologies that firms could implement to raise productivity. It’s less obvious that there is today.

We must, therefore, be sceptical of whether wage-led growth can work. The issue is not that Biden has lurched to the left or is bashing the rich. It is that the environment which made pro-worker policies work also for capital owners in the 50s might no longer exist. 

Chris Dillow is an economics commentator for Investors’ Chronicle

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