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MBA Course work: Corporate Finance 18th March 2011
Bradford University School of ManagementFull Time MBA 2010 – 11
Evaluation of Shareholder Value and Market Evaluation of Equity for
UB No: xxxxxxxxx
Module Name: Corporate FinanceModule Leader: Patrick Barber
Module Code: MAN4071M
I certify the word count does not exceed more than the number of words mentioned: 3500(Excluding References, Appendix, tables, name of graphs/figures/tables, figure captions, table captions, abbreviations)
UB: xxxxxxxxxx Page 1 of 44
MBA Course work: Corporate Finance 18th March 2011
Abbreviations:
BRIC: Brazil Russia India China
DCF: Discounted Cash Flow
EPS: Earnings per Share
EVA: Economic Value Added
FCF: Free Cash Flow
GBP: Great British Pound
MVA: Market Value Added
NOPAT: Net Operating Profit after Tax
NPV: Net Present Value
P/E: Price/Earning
PLC: Private Limited Company
SAV: Shareholders Value Analysis
TSR: Total Shareholders Reuters
UN: United Nations
USD: United States Dollar
Y-o-Y: Year-on-Year
UB: xxxxxxxxxx Page 2 of 44
MBA Course work: Corporate Finance 18th March 2011
Introduction:..........................................................................................5
Executive summary:..............................................................................5
Company Overview:...............................................................................6
Financial Position:.................................................................................8
Future of Unilever:..............................................................................11
Shareholder Value Analysis (SAV):..................................................11
Total Shareholders Return Analysis:.............................................12
Market Value Added (MVA):.........................................................14
Economic Value added (EAV):.......................................................15
Dividend Payout...................................................................................16
Effective Market Hypotheses:.............................................................17
Share price movement:........................................................................18
Equity Evaluation:...............................................................................20
Net Asset Value:...............................................................................20
Price/Earning Value (P/E):................................................................22
Discounted cash flow:.......................................................................23
Revenue Growth:...........................................................................24
Operating margin:.........................................................................24
Depreciation and Amortization (D&A):.........................................25
Tax Rate:.......................................................................................25
Capital Expenditure:.....................................................................26
Working Capital:............................................................................26
Free Cash Flows:...........................................................................27
Cost of Equity:.....................................................................................27
Gordon Growth Model:.....................................................................27
Capital Asset Pricing Model:............................................................28
Free Cash Flow (FCF) and Net Present Value:...................................29
Terminal Value:...................................................................................30
Sensitivity Analysis:.............................................................................30
Long Term Growth Rate:..................................................................31
Best Case Scenario........................................................................31
UB: xxxxxxxxxx Page 3 of 44
MBA Course work: Corporate Finance 18th March 2011
Worst Case Scenario.....................................................................31
Discount factor:................................................................................32
Best Case Scenario:.......................................................................32
Worst Case Scenario:....................................................................33
Sales Revenue:.................................................................................34
Best Case Scenario........................................................................34
Worst Case Scenario:....................................................................35
Conclusion:..........................................................................................35
Reference:............................................................................................37
Appendix:.............................................................................................39
List of Figures:
Figure 1: Beauty and Personal Care Percentage Market Share...........6
Figure 2: Home Care Products Market Share.......................................7
Figure 3: Packaged Food Market Share................................................7
Figure 4: Global Home Care Market Share...........................................8
Figure 5: Key Finance Indicators..........................................................8
Figure 6: Financial Report.....................................................................9
Figure 7: Earnings per Share..............................................................10
Figure 8: Long Term Debt...................................................................10
Figure 9: SAV.......................................................................................11
Figure 10: Dividend Payout.................................................................13
Figure 11: TSR as %............................................................................14
Figure 12: EVA....................................................................................16
Figure 13: Unilever Time Series..........................................................17
Figure 14: Share Performance............................................................18
Figure 15: NAV per Share...................................................................21
Figure 16: P/E Value............................................................................22
Figure 17: Unilever's Dividend per Share...........................................28
UB: xxxxxxxxxx Page 4 of 44
Introduction:
Organization valuation remains critically important for any investor
irrespective of the economic market conditions. It is only after
valuation, an investor makes buying or selling decisions and estimates
true value of the company. Brealey and Myers (1996) claims, knowing
the value of the asset enables the stakeholders of a company to make
intelligent decisions. Every investor has his/her own valuation
methodology, however, the underlain valuations principles, such as
NAV, P/E, DCF and many such, for any investors more or less remains
the same. Therefore, the premise of valuating the chosen organization
is that a realistic estimation is made on the assets bases through
publicly available information.
This course being with an objective of evaluation, followed by an
executive summary which gives a shorthand information on the
Executive summary:This report is on shareholders value and market evaluation for
Unilever (PLC), also called as the Unilever Group or Group. The
report begins with the overview of the company, giving the present
market situation and the market share of Unilever in consumers
goods, home and personal care and packaged food industry in the
U.K. Followed by the financial situation which talks about Unilever’s
performance for the fiscal year 2010. A critical evaluation has been
made on the in fluctuations in the turnover, operating profit, earnings
per share and on long term debts. The prospects of Unilever are
discussed in the later section, by using detailed analysis of TSR, P/E
and EAV, in addition, comparison are made with peer groups such as
Colgate-Palmolive, Procter & Gamble and Reckitt Benckiser.
Comments are also made on the Dividend payout practice of the above
companies. Share price movement of Unilever, from 1st Feb 2010 to
31st Jan 2011 is discussed in the following section. Different methods
of equity evaluation are used to took at the prospects of Unilever for
10 year period from the base year. A detailed cash flow is also made
considers various favoring and adverse conditions.
Company Overview:Unilever, Chaired by Michael Treschow, is a €44.3 billion turnover,
fortune 500 (Ranked: 121, Source: CNNMoney.com), global
conglomerate in food, home and personal care products, having
presence in more than 180 countries with 167000 employee. Unilever
claims that 150 million times a day, someone somewhere chooses a
Unilever product. The top 12 brands, Axe/Lynx, Blue Band, Dove,
Becel/Flora, Heartbrand ice-cream, Hellmann’s, Knorr, Lipton, Lux,
Omo, Rexona and Sunsilk contribute €1 billion to sales and top 20
brands contribute 70% of the total sales. (Unilever, 2010 financial
report)
Unilever N.V (N.V) is a public Unilever N.V. (NV) is a public limited
company registered in the Netherlands. Unilever PLC (PLC) is a
public limited company registered in England and Wales. It has shares
listed on the London Stock. However, the two parent companies, NV
and PLC, together with their group companies, operate as a single
economic entity (the Unilever Group, also referred as the Unilever.
In the year 2009, Unilever sharpened it product portfolio by acquiring
Sara Lee personal care business and in the year 2010, Unilever
announced the acquisition of Alberto Culver.
In the U.K, Unilever has been increase its market share percentage in
Beauty and Personal Care, Home care, and packed foods since 2001
and has seen a steep increase in both Beauty care and care products
during the year 2005.
0.15 0.21 0.21 0.21
6.58 6.47 6.33 6.31 6.37
0
1
2
3
4
5
6
7
2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 1: Beauty and Personal Care Percentage Market Share (Source: Global Market Information Database)
1.05 1.07 1.17 1.26
14.94 14.63 15.15 15.7817.18
0
2
4
6
8
10
12
14
16
18
20
2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 2: Home Care Products Market Share (Source: Global Market Information Database)
0.01 0.01 0.02
1.72 1.66 1.68 1.69 1.65 1.64
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 3: Packaged Food Market Share (Source: Global Market Information Database)
Though Unilever has low market presence in the U.K, it has been
ranked 6th in global Health and wellness industry with 1.4% market
share, 10.4% in the Home Care and is ranked number one, globally, in
the ice-cream industry with a global market share of 18% (Global
Market Information Database).
Figure 4: Global Home Care Market Share (Source: Global Market Information Database)
Financial Position:In the recent economic downturn, many organization had to face
sever cash flow problems due to low consumer spending; fall in sales
and low liquidity. However, Unilever, on the contrast, has experienced
best volume growth for more than 30 year, increased its sales growth
by 4.1% and increased its operating margin by 15%.
Figure 5: (Key Finance Indicators, Source: Unilever PDF)
Financial Report
39,642 40,187 40,523 39,82344,262
5,408 5,245 7,167 5,020 6,339
0
10,000
20,000
30,000
40,000
50,000
2006 2007 2008 2009 2010
E m
illi
on
s
Turnover Operating Profit
Figure 6: Financial Report (Source: Unilever website)
The 15% increase in the operating profit or the 11.1% increase in the
turnover cannot be completely attributed to the 5.4% increase in the
volume sales. As a global conglomerate, the average 7.3% currency
variation also contributed to the increase in the operating profit. The
decrease in the net cash flow from operating activities by 4.9%
between the years 2009-10 supports the above argument. The net
income, in the 2010 annual report, also reflects decreased
restructuring costs, decreased financial costs and increase from
business disposals. Though there was a volume growth, due to current
economic conditions and intense competition, Unilever had to price its
products with minimal margin. However, with the current focus on
BRIC nations and penetration in to African continent could help
Unilever achieve economics of scale and increase its operating
margins. In addition, Unilever’s financial performance was
significantly good when compared with its competitors such as P&G,
with 4.2% increase in operating income and 2.9% increase in the net
sales, and Nestle, with 1.9% increase in the net sales.
Earnings per Share
1.191.32
1.79
1.21
1.46
00.20.40.60.8
11.21.41.61.8
2
2006 2007 2008 2009 2010
euro
Figure 7: Earnings per Share (Source: Unilever Annual Share)
During the year 2008-09, there was a drop in EPS by 32.4%, this drop
was not with the performance of the company, but due to the earning
earned by disposals of European frozen food business during 2007-08.
Nevertheless, EPS continued to rise by 21% during 2009-10 Y-o-Y.
Long Term Debt
7,289
9,9718,823
0
2,000
4,000
6,000
8,000
10,000
12,000
2008 2009 2010
E m
illi
on
Figure 8: Long Term Debt (Source: Unilever Annual report)
To maintain maximum flexibility in meeting the changing business
environment it is important to concentrate on cash., Unilever, for
raising capital, not only relies on shareholders funds but also on long
term debts. However, the long-term loans for Unilever are instituted
either by Unilever Finance International BV or by Unilever
Capital Corporation. This backward integration would help Unilever in
prospering markets as the profits is shared within the group, but
could also be lethal if there is no enough operating profit is generated.
Future of Unilever:The penetration into African continent by launching more than 100
products (OMO being the most successful one so far) and increasing
market share in the BRIC nations shows a potential growth prospects
for Unilever in the coming years. The increase EPS Y-o-Y since 2005
attracts new investors for long-term investment. The acquisition of
Sare Lee in 2009 and the acquisition announcement of major
European home and personal care brand Alberto Culver help Unilever
to widen its product portfolio and increased markets share in the
existing European and global market.
Shareholder Value Analysis (SAV):
Figure 9: SAV (Source: Pike and Neale, 2009)
SAV helps in ascertaining value add to the shareholders of a firm.
Rappaport’s (1986) SAV pyramid says focus on “Value Drivers” can
help to add value to shareholders wealth, and created confidence in
the market to attract new investors.
Unilever has been consistently delivering value to its shareholders. As
a consumer goods industry, Unilever’s prime focus is to increase
markets share, either by increasing sales or through acquisitions and
partnerships, entering new geographies and improving brand value
globally. In addition, in changing market environment and concern for
environment also enabled Unilever to invest significantly into
research, development and innovation. From a strategic point of view,
these business focuses are key value drives to improve cash flow and
the consistent A+/A1 long-term credit rating and A1/P1 short-term
credit rating are good signs to generate finance for operation.
Dividend + (Closing Share Price - Opening Share Price)TSR = ---------------------------------------------------------------------
Opening Share Price
Dividend + (Closing Share Price - Opening Share Price)TSR = ---------------------------------------------------------------------
Opening Share Price
However, the value added by Unilever to its shareholders can be
calculated using three methods, such as:
1. Total Shareholders Return
2. market Value Added
3. Economic Value Added.
Total Shareholders Return Analysis:In general, it is considered that, higher the risk associated with an
investment, the greater are the returns. In addition, the firm that
delivers investment above the market rate would offset the risks that
are specific to it and to gain the market confidence it is essential to
have a consistent performance. Unilever aims to be among the top
three companies of the reference group, which include international
consumer goods companies.
TSR is calculated using the formula below.
The dividend payout of Unilever is progressive since 2006, however, it
is very low when compared with its peer groups. Nevertheless,
Unilever is among the top three players in the global consumer goods,
health and personal care, and packaged foods in TSR percentage.
Dividend Payout
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6G
PB
Unilever 0.46 0.49 0.55 0.64 0.7
Colgate Palmolive 0.19 0.78 1.23 1.51
Reckitt Benckiser 0.21 0.5 0.62 0.92 1.07
Procter & Gamble 0.2 1.23 1.23
2006 2007 2008 2009 2010
Figure 10: Dividend Payout (Source: FT.com)
Unilever practices two-dividend payout each year. In 2009, there was
an increase of 14% in dividend payout, though not the highest
percentage change in the industry sector, but was certainly highest in
the history of Unilever so far. In addition, in the same year, the share
price rose by 139p, which can be attributed to the acquisition of Sara
Lee’s home and personal care segment. In 2010, Unilever paid
quarterly divided, as never before, with an increase of 9%,
nevertheless, it is one in its sector to pay highest divided. An
interesting point to note here is TSR is seldom negative, even in
current economic conditions, although there has been slack growth in
the share price. Therefore, it can be deduce that, packed food
industry experiences less impact by economic depressions when
compared with other industry sectors.
Total Shareholder Value: Comparison AnalysisUnilever 2006 2007 2008 2009 2010Dividend Paid in p 460 490 550 640 700Dividend Growth in Percentage NA 7% 12% 14% 9%Share Price on 1st Feb 1327 1411 1715 1528 1913
Share Price on 31st Jan 1330 1390 1623 1389 1910Change in Share Price -3 21 92 139 3TSR in percentage 34.43858 36.21545 37.4344 50.98168 36.74856Colgate Palmolive Dividend Paid in p NA 0.19 0.78 1.23 1.51Dividend Growth in Percentage NA NA 310.5263 57.69231 22.76423Share Price on 1st Feb NA 69.5 77.368 63.4 79.55Share Price on 31st Jan NA 77.96 68.54 82.15 79.55Change in Share Price NA 8.46 -8.828 18.75 0TSR in percentage NA 12.44604 -10.4022 31.5142 1.898177Reckitt Benckiser Dividend Paid in p 0.21 0.5 0.62 0.92 1.07Dividend Growth in Percentage NA 138.0952 24 48.3871 16.30435Share Price on 1st Feb 1991 2485 2660 2671 3194Share Price on 31st Jan 1994 2612 2607 2694 3256Change in Share Price 3 127 -53 23 62TSR in percentage 0.161226 5.130785 -1.96917 0.895545 1.97464
TSR Graph
-20 -10 0 10 20 30 40 50 60
2006
2007
2008
2009
2010
TSR Percentage
Reckitt Benckiser
Colgate Palmolive
Unilever
Figure 11: TSR as %
Considering the interim share price value on 26th March 2006, the
price per share and purchase value was 1,306.67 GBp, would price
1795 GBp as on 14th March 2011, which is an increase by 37.37% and
a total return of 488.33 GBp, which is significantly good return when
compared with the -6.5% return with FTSE 100 industry. In spite the
promising figures, the economic factors governing (directly or
indirectly) cannot possible tell the true value added to the
shareholders.
Market Value Added (MVA):MVA has become an important tool for financial managers to evaluate
their firm with the help of market value added in a manner that is
consistent with the evaluation by the capital markets (Young and
O’Byrne 2000). This evaluation is build on the primes that someone is
always right. Nevertheless, this method not only emphases on the
traditional accounting method but also the value added to the
shareholders.
Market Value AddedUnilever 2006 2007 2008 2009 2010Price as on 31 Jan 1330 1390 1623 1389 1910(*)Total Outstanding shares in m GBP 484 484 484 484 484(=) Market Capitalization (in m GBP) 643720 672760 785532 672276 924440(-) Shareholders equity 4,745 3888 5027 3370 4244(=) Market Value Added 638,975 668872 780505 668906 920196Colgate Palmolive Price as on 31 Jan 65.24 77.96 68.54 82.15 79.55(*)Total Outstanding shares in m GBP 188.0 509.0 262 354 325(=) Market Capitalization (in m GBP) 12265.12 39681.64 17957.48 29081.1 25853.75(-) Shareholders equity 517.8 1179.7 945.7 2017 2139.8(=) Market Value Added 11747.32 38501.94 17011.78 27064.1 23713.95Reckitt Benckiser Price as on 31 Jan 1994 2612 2607 2694 3256(*)Total Outstanding shares in m GBP 734.2 733.6 722.4 722.4 728.6(=) Market Capitalization (in m GBP) 1463995 1916163 1883297 1946146 2372322(-) Shareholders equity 1,866 2,385 3,294 4,014 4,325(=) Market Value Added 1462129 1913778 1880003 1942132 2367997
The higher MVA in the last two years for Unilever can be attributed to
the acquisition of Sara Lee and Alberto Culver, however, no clear
statement in given in the annual report as by how much this value has
been increase/decrease by the recent acquisition. Nevertheless, to
make the most of out the MVA method, it is advised to segment
products that gives positive NPV.
EVA = NOPAT – (Ke * Invested Capital)EVA = NOPAT – (Ke * Invested Capital)
Economic Value added (EAV):EVA attempts to measure the economic profit added by the company
to the shareholder over the previous year.
EVA can be calculated using the formula below:
NOPAT= Net operating profit after taxKe = the rate of return required by the shareholdersInvested Capital = Net Assets or Shareholders fund
Economic Value AddedUnilever 2006 2007 2008 2009 2010NOPAT (in million Euros) 5015 4136 5285 3659 4244Ke 8 8 7.8 8 7.7Invested Capital 23188 23743 22342 25417 27561EVA 3159.96 2236.56 3542.324 1625.64 2121.803
Economic Value Added
3159.96
2236.56
3542.324
1625.64
2121.803
0
500
1000
1500
2000
2500
3000
3500
4000
2006 2007 2008 2009 2010
EV
A i
n m
Eu
ros
Figure 12: EVAThough the EVA remained positive, which mean Unilever has been
effectively making profit for its investor since 2006, it has been
declined since 2009. One reason being the NOPAT has been
decreasing however, investors return expectation remained the same,
in addition, the capital investment has also increased over the years,
which, therefore, declined the EVA.
The EVA however, does not give the true picture of the value, the
organization has added to its shareholders. In the above case, EVA is
decreased due to increase in investment and decrease in NOPAT,
however, with recent updates in product portfolio (by acquisition) and
targeting new geographies add value to the shareholders investments.
Dividend PayoutDividend Payout
Unilever 2006 2007 2008 2009 2010Earnings Per Share (EPS) in P 115.00 128.00 173.00 117.00 146.00Dividend Per Share (DPS) in P 48.00 51.00 61.00 41.00 71.00Dividend Cover (EPS/DPS) 2.40 2.51 2.84 2.85 2.06Dividend Payout Ratio (DPS/EPS) in % 41.74 39.84 35.26 35.04 48.63Share Price as on Jan 31st in P 1330.00 1390.00 1623.00 1389.00 1910.00Dividend Yield (DPS/Share Price) 3.61 3.67 3.76 2.95 3.72Colgate Palmolive Earnings Per Share (EPS) in P 90.28 165.00 180.00 313.00 283.00Dividend Per Share (DPS) in P 45.87 72.24 76.75 123.15 133.34Dividend Cover (EPS/DPS) 1.97 2.28 2.35 2.54 2.12Dividend Payout Ratio (DPS/EPS) in % 50.81 43.78 42.64 39.35 47.12Share Price as on Jan 31st in P NA 7796.00 6854.00 8215.00 7955.00Dividend Yield (DPS/Share Price) NA 0.93 1.12 1.50 1.68Reckitt Benckiser Earnings Per Share (EPS) in P 93.50 127.90 154.70 194.70 213.80Dividend Per Share (DPS) in P 41.50 55.00 80.00 100.00 115.00Dividend Cover (EPS/DPS) 2.25 2.33 1.93 1.95 1.86Dividend Payout Ratio (DPS/EPS) in % 44.39 43.00 51.71 51.36 53.79Share Price as on Jan 31st in P 1994.00 2612.00 2607.00 2694.00 3256.00Dividend Yield (DPS/Share Price) 2.08 2.11 3.07 3.71 3.53
Unilever Times Series
020406080
100120140160180200
2006 2007 2008 2009 2010
Per
cen
tag
e Dividend Yield (DPS/SharePrice)
Dividend Payout Ration
Figure 13: Unilever Time Series
48.63% dividend payout ration in 2010 and the increasing value of it
since 2006 is evident that Unilever’s management aims to return
funds to its shareholders. This is a good attempt to retain the
confidence of current shareholders and to attract new one.
Effective Market Hypotheses:EMH is primarily used to measure the efficiency of the capital market.
The seriousness of the information available on an organization
depends on the EMH of that market. EMH assumes that the market is
efficient in receiving and responding to the information available on a
company and investors are rational in making their decision on this
decisions. Fama (1970) indentified three forms of information
efficiency for stock markets.
1. Weak form
2. Semi-strong form
3. Strong form
The London Stock exchange is considered to be the global hub of
finance market, therefore the U.K law imposed strict law on the
markets to for effective operations. Nevertheless, some false
information often speculates among investors. Therefore, LSE is to be
between semi-strong and strong form, where the stocks react
rationally to both past performances and publicly announced
information as evidenced by the stock price movement.
Share price movement:
Figure 14: Share Performance (Source: Ft.com)
1st Feb 2010: Cadbury’s shareholders received a tidy profit due to the
courtesy of Kraft, which boosted proceedings to retain exposure to
consumer goods industry
26th Mar 2010: Qinetiq to downgrade to sell from its house broker,
created ripples in market causing negative in the first day four.
5th April 2010: Unilever marketing chief commented on there
inability to focus on digital media advertizing.
1st May 2010: Announced volume growth on ice-creams by cutting
cost, and introduced ‘Dove’ brand products for men.
21st June 2010: The drop was seen after Unilever announced, Mr.
KFC Weed (Director), transferred 4000 Unilever PLC ordinary shares
to his spouse. In addition, he sold 12, 057 Unilever shares at the price
£19.02 per share.
5th July 2010: share price shot up as Unilever was awarded as the
company of the year in the community’s responsibility business
awards.
05th August 2010: The drop got steady, when Unilever CEO
announced 2010 first half yearly results, Turnover up by 9.7% at
Turnover up 9.7% at €21.9 billion, Underlying volume growth 6.6%,
Underlying sales growth 3.8% , underlying price growth (2.6)%,
Underlying operating margin up 30bps, Net cash flow from operating
activities €2.2 billion, up €0.2 billion, Fully diluted earnings per share
€0.70.
15th Sept 2010: Share price accelerated after Unilever announced
management actions for sustainable growth.
14th Oct 2010: UN’s initiative to collaborate with multinational
companies to combat poverty, positively affected Unilever’s share
price as it took it as a corporate social responsibility.
04th November 2010: Share price kept rising when 3rd quarter and
9 months results were announced. 4.8% volume growth, 3.6% sales
growth, operating profit up by 20bsp, turnover up 10.9%, fully diluted
EPS €1.13 up 29%
6th December 2010: Unilever completes SARA LEE Personal Care &
European Laundry Acquisition.
24th Jan 2011: Analyst report says, 50% of Unilever’s raw materials
comes for forest. Excessive rain in Canada and Pakistan, droughts in
Russia and US cutting exports and stocking agriculture material
NAV = [Fixed Assets + Current Assets] – [Current Liabilities + Long Term Debt]NAV = [Fixed Assets + Current Assets] – [Current Liabilities + Long Term Debt]
created tensions for Unilever, which imports majorly from all these
countries, creating lowering share price in the market.
Equity Evaluation:The shareholder theory suggests that the financial decisions made in a
firm are focused on value creation to its shareholders (Muller 2009).
The use of evaluation helps management to make seasoned financial
decisions, such as:
Acquisition
Reacting to takeover bid
IPO floatation
Privatization
Management buy-out
Any one of the actions can be taken on an organization using Net
Asset Value, Price/Earning ratio (P/E), Discounted Cash flow methods.
Net Asset Value:NAV analysis is made on the value of assets and liabilities mentioned
in the balance sheet, however, these values are book values which are
financed both my equities and debts. NAV is calculated using the
below formula.
NAV’s formula can also be used to calculate shareholders equity.
14.311.78
4.61 4.95
19.06
10.48
0
5
10
15
20
25
2010 2009
NV
A/s
har
e
Unilever Colgate Palmolive P&G
Figure 15: NAV per Share (Source: Financial Reports of Unilever, Colgate Palmolive and P&G)
Although the NAV per share of Unilever has increase by 21.4% since
2009, its absolute value is less in comparison with P&G, which grew
Net Present Value (in million except per share)Unilever 2010 2009Fixed Assets 28683 26205Current Asset 12484 10811Current Liabilities 13606 11599long term debt 8823 9971NAV 18738 15446Avg no. of Outstanding share 1310.1 1310.1NAV per share 14.30 11.79Colgate Palmolive Fixed Assets 5432.6 5639Current Asset 2723 2934Current Liabilities 2721 2771long term debt 2055 2172NAV 3379.6 3630Avg no. of Outstanding share 733 733NAV per share 4.61 4.95P&G Fixed Assets 71870 80856Current Asset 12340 15684Current Liabilities 15953 51159long term debt 14033 14787NAV 54224 30594Avg no. of Outstanding share 2843.47 2917.03NAV per share 19.06 10.48
81.9% since 2009. However, this steep increase in NAV per share %
for P&G is due less number of ordinary share in 2010 compared to
2009. However, when Unilever and P&G are compared on business
scale, the NAV/Share of both is justified.
Price/Earning Value (P/E):The P/E method values the company based on future performance
expectations. It indicates the market rating of the future earning
potential of the company (Healy and Palepu 2008). A high P/E ratio is
an indication of shareholders trust on the companies future prospects.
16295.4920604.29
55454.14
0
10000
20000
30000
40000
50000
60000
Unilever Colagate P&G
P/E Value
Figure 16: P/E Value (Source: Financial Report of Unilever, Colgate and P&G)
The P/E value however, does not represent the actual trust of
shareholder in investing in a company, the reason being, the
fundamental principles of P/E value calculation. It look at the profit
which can be changed either by retaining earnings (not paying
P/E Ratio Unilever Coalgate P&GEarnings per Share (in p) 146 283 241Share Price on 31st Jan/11 1816 7955 4700P/E Ratio 12.44 28.11 19.50No. of Share 1310.1 733 2843.5P/E Value 16295.49 20604.29 55454.15
dividends), or by decreasing number of shares (which is not a good
idea). Although, Unilever’s P/E value is low when compared with the
peer group, its recent entry into new geographies and successful
merge of Sara Lee’s home and personal care products, are enough to
talk about the effective management and prospects in future and in
investors trust.
For valuing purpose, one needs to zero-in on a fair P/E value. This is a
subjective process and it depends on lots of factor. For brevity, the
fair P/E value calculation is:
It is therefore clear that, the current P/E value of Unilever is under
valued, when compared with the fair P/E value.
Discounted cash flow:The DCF is perhaps the most widely used valuation method of
valuation. It not only focuses on profits but also on cash flows, which
are less easy to manipulate. DCF also uses the investor’s required
return as the basis for assessing the value of cash flows. The valuation
is performed by forecasting the cash flow that is generated by the
value drivers. The cash flow is calculated with forecasted revenue
and deducting all the cash based expenses that are incurred by the
business that includes tax and capital expenditure.
P/E time series Average = 15. 14 (calculated)
(LondonStockExchange.com)
P/E five year high = 20.10
P/E five year low = 9.55
Avg 5 year high/low = (20.10+9.55)/2 =14.82 (Source:
Returns.com)
The cash flow of Unilever is forecasted based on publicly available
information on its sustainable growth strategy. The forecast is made
for the next 10 year, and the enterprise value is determined at
terminal year. The beauty of DCF is that, it controls the forecasting
errors by discounting cash flows to find NPV; in addition, the remote
years are discounted more stringently than the close years to further
minimize errors.
Revenue Growth:Unilever has recorded highest volume growth in 2010 in sever
economic conditions. With shoots of recovery of the current economic
downturn and focus on emerging markets can help Unilever maintain
sustainable growth of over 3% for the next 10 year. It is likely that,
Unilever could see an increase in revenue by 5.1% for the next 5 year,
which can drop (calculating most pragmatically) to 4.6% in the 2015
and 2016, to 3.8% in 2019 and finally at 3.6% in 2020. However, on a
very optimistic assumption, it is likely that Unilever can grow 5%
annually. (Appendix 3 for historic growth)
Revenue Growth by Discounted cash flow
2010 (Base) 2011 2012 2013 2014 2015 2016 2017 2019 2020
% increase in Revenue 4.1 5.1 5.1 5.1 5.1 5.1 4.6 4.6 3.8 3.6Sale Revenue in € m 44262
46519.36
48891.85
51385.33
54005.99
56760.29
59371.26
62102.34
64462.23
66782.87
Operating margin:Ever since 2006, Unilever has been maintaining an operating margin
above 10%. In 2010, it has seen 14.3% operating profit, which is 10
year high. However, this is expected to grow with the advent of
technology implementation in operations, in addition, Unilever has
also started a supply chain management program across the global
(Unilever.com, 2010). This can help maintain operating margin above
14%, which means 86% goes into operating costs.
2010 (Base) 2011 2012 2013 2014 2015 2016 2017 2019 2020
% increase in Revenue 4.1 5.1 5.1 5.1 5.1 5.1 4.6 4.6 3.8 3.6Sale Revenue in € m 44262
46519.36
48891.85
51385.33
54005.99
56760.29
59371.26
62102.34
64462.23
66782.87
Operating cost % 85.7 85 85 85 85 85 85 85 85 85Operating Cost in m
37932.534
39541.46
41558.07
43677.53
45905.09
48246.25
50465.57
52786.99
54792.9
56765.44
Operating Margin (%) 14.3 15 15 15 15 15 15 15 15 15EBITDA in € m
6329.466
6977.904
7333.777
7707.8
8100.898
8514.044
8905.69
9315.351
9669.335
10017.43
Depreciation and Amortization (D&A):The D&A rate for Unilever since 5 years has been over 3.4%, the
average depreciation for last three years has been 3.68% (see
Appendix 5), and it is assumed that it is like to continue for the next 5
years. It should be noted that, Unilever does not include free land cost
into depreciation, therefore only plants, machineries and other
perishable equipment are considered while calculating depreciations.
However, the depreciation rate could increase to 3.8% for the next
two years due to obsolescence of technology and finally to 4.0% in the
terminal years. Unilever, also considers Depreciation as an operating
expense while arriving at profit, but is added later in the cash flow as
it is cash less expense. In addition to D&A, as a global conglomerate,
Unilever has experienced 7.1% financial loss, which can be attributed
to instability in the currency market, which is assumed constant for
the next 10 years.
2010 (Base) 2011 2012 2013 2014 2015 2016 2017 2019 2020
% increase in Revenue 4.1 5.1 5.1 5.1 5.1 5.1 4.6 4.6 3.8 3.6Sale Revenue in € m 44262
46519.36
48891.85
51385.33
54005.99
56760.29
59371.26
62102.34
64462.23
66782.87
Operating 85.7 85 85 85 85 85 85 85 85 85
cost %Operating Cost in m
37932.534
39541.46
41558.07
43677.53
45905.09
48246.25
50465.57
52786.99
54792.9
56765.44
Operating Margin % 14.3 15 15 15 15 15 15 15 15 15EBITDA in € m
6329.466
6977.904
7333.777
7707.8
8100.898
8514.044
8905.69
9315.351
9669.335
10017.43
D&A as % 3.4 3.68 3.68 3.68 3.68 3.68 3.68 3.8 3.8 4
D&A in € m215.20
1844256.
7869269.883
283.647
298.113
313.3168
327.7294
353.9834
367.4347
400.6972
Other expenses as (%) 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1Other expenses in € m
449.392086
495.4312
520.6982
547.2538
575.1637
604.4971
632.304
661.3899
686.5228
711.2376
EBIT in € m5664.8
72076225.686
6543.196
6876.899
7227.621
7596.23
7945.656
8299.978
8615.377
8905.496
Tax Rate:As one of the world’s leading financial capital market, the government
of U.K has maintained stable taxation rate. The corporate tax rat
which was 28% in 2010 was reduced to 27% in 2011, which is least in
the major G7 economies, a major advantage for multinational
companies (HMRC.gov.uk, 2011). It is also likely that, to boots
economy, U.K government would further reduce the corporate tax
rate to 26% during 2019 and 2020.
However, to raise cash, Unilever make long-term debts, the interest to
which on an average is calculated as 6.37% (see appendix 2)
EBIT in € m5664.
872076225.686
6543.196
6876.899
7227.621
7596.23
7945.656
8299.978
8615.377
8905.496
Tax in (%) 27 27 27 27 27 27 27 27 26 26
Tax Paid1529.
515461680.935
1766.663
1856.763
1951.458
2050.982
2145.327
2240.994
2239.998
2315.429
Interest payable after tax in (%) 6.37 6.37 6.37 6.37 6.37 6.37 6.37 6.37 6.37 6.37
Net Earnings € m3871.
934394255
.254472.268
4700.354
4940.072
5192.015
5430.848
5673.027
5969.268
6170.28
Capital Expenditure:The average capital expenditure since 2006 is 2.9%, however, it was
3.9% for 2010, which has been increasing since 2008. This increase
can be attributed to Unilever’s rapid expansion in to support the
growing volume growth by investing in building new capacities in the
emerging markets. It is assumed that, to increase global market share
Unilever keeps investing in new geographies at a rate of 3.9%.
Net Earnings € m3871
.934255
.254472
.264700
.354940
.075192
.015430
.845673
.025969
.266170
.28Investment in (%) 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
Investment in € m1726
.211814
.251906
.782004
.022106
.232213
.652315
.472421
.992514
.022604
.53Net Earnings after investment € m
2145.71
2440.99
2565.48
2696.32
2833.83
2978.36
3115.36
3251.03
3455.24
3565.74
Working Capital:
Using historic data (see Appendix 9) of Unilever it is estimated that
3% of the total revenue generated is used as working capital. For any
organization to work smoothly, working capital is essential. Negative
working capital in the historic data suggest that Unilever was in cash
debt. Using a optimistic approach, it is assumed that 3% of the
working capital would be required for Unilever through out the next
10 year period. This is also justified by Unilever’s expansion plans to
handle increasing volume growth.
Estimated working capital as (%) of revenue
0.0023 3 3 3 3 3 3 3 3 3
Working Capital € m 1.01 13961467
1542
1620
1703
1781
1863
1934
2003
Change is working capital € m NA1394.56
71.17
74.80
78.61
82.62
78.32
81.93
70.79
69.61
Free Cash Flows:FCF is the cash flow that is free of all financial obligations. It is the
cash available for disposal on strategic investment decisions which is
at the discretion of directors. Unilever has been efficient in generating
FCF; however, it claims that FCF is not used as a liquidity measure.
Although the average FCF for the past 5 year is € 3907 million (see
appendix 9), it is assumed that, its growth will be in line with the
growth of revenue.
Net Earnings after investment € m
2145.72
2441.00
2565.49
2696.33
2833.84
2978.36
3115.37
3251.04
3455.24
3565.75
Estimated working capital as (%) of revenue
0.0023 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
Working Capital 1.021395.58
1466.76
1541.56
1620.18
1702.81
1781.14
1863.07
1933.87
2003.49
Change is working capital NA1394.56
71.17
74.80
78.62
82.63
78.33
81.93
70.80
69.62
Free Cash Flow (FCF)3365.00
3502.97
3681.62
3869.38
4066.72
4274.12
4492.10
4698.74
4914.88
5101.64
Cost of Equity:The cost of equity is the return that a common share holder expects in
return to the investment made. There are two methods to calculate:
GRM : Gordon Growth Model
CAPM : Capital Asset Pricing Model
Gordon Growth Model:The GGM method is used as indicator of future dividend growth based
on the past dividends (Puxty et al 1988). GGM measure the difference
the difference in the dividends paid out by the firm to its investors,
therefore, this method is suitable for those firms that consistently pay
dividends. If there is inconsistency (or no growth) in the dividend
payout, GGM model may not be a suitable technique. GGM is build on
the assumption that the rate of growth in dividends is constant
indefinitely, which is not possible in highly competitive market
environment. Consider Unilever’s dividend payout graph below,
although there has be increasing growth in the dividend payout has
been increasing since 2006, there was a sudden drop in 2009. This
was due to the retention of earnings used as cash for acquisition
purpose. Therefore, GGM cannot realistic value of future equity.
Unilever's Dividend per share
71
41
48
6151
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010
in
p
Figure 17: Unilever's Dividend per Share (Source: Unilever Annual Report, 2010, 2009, 2008, 2007, 2006)
Capital Asset Pricing Model: In contrast to GGM, CAPM does not require growth projections, nor
does it depend on the instantaneously efficiency of the market (Pike
and Neale 2009). This is because, CAPM considers Market Risk
Factors in calculation and is not based on the past performance of
company and on the dividend payout history.
CAPM considers the following:
RF : Market Risk Free Rate, usually government stocks
ERM : Expected return on the overall market
β : Beta Value, market risk of individual security
The difference between ERM and RF is regarded as market risk
premium. Beta value (β) is analyzed on greater than or less than value
over one. If β<1 low risk, hence low reuters. If β>1, high risk, high
reuters. β for a company varies years on year bases, and different
analyst predict different values for β.
Beta value
Source Unilev
er
P&G Colgate
Palmolive
Reuters.c
om
.66 0.51
87
0.4892
Capital Asset Pricing Model (Cost of Equity, KE = RF+ β*(ERM-RF))
Company Risk Free
Rate(RF)
Beta(
β)
Equity Risk
Premium
Cost of
Equity
Unilever 3.7% .66 4.5% 6.67%
Colgate-
Palmolive
3.7% .518
7
4.5% 6.03%
P&G 3.7% .489
2
4.5% 5.90%
Free Cash Flow (FCF) and Net Present Value:Prudently, the forecast of free cash flow for the next 10 years is
discounted at a rate of 8%, to find the Net Present Value of €
26145.13 million
Terminal Value:In the current economic conditions and putative continuous narrowing
margins is certainly a concern for Unilever. However, with the current
performance and brand recognition there is certainly no end in the
near future. Nevertheless, terminal values are calculated to determine
the value of the company at the end of the 10th year. IMF has
forecasted 8.0% growth rate for India, and 9.8% growth for China,
which are big markets for Unilever, and 2.6% growth rate for the U.K
(bbc.com). Assuming Unilever will also grow by the same rate, the
terminal values are calculated.Final Year FCF * (1+Longterm Cash flow growth rate)Terminal Value =
------------------------------------------------------------------(Discounted Factor-Long term cash flow growth rate)
Terminal Value = 5101.64*(1+2.6%)/(8%-2.6%) =
€ 96648 million
Discounted Terminal Value = Terminal Value x (1+
Ke)^10
= 48465.6*0.5000 = € 48323.8
million
Enterprise Value:
Sensitivity Analysis: Pike and Neale (2009) mention that the sensitivity analysis is used to
isolate and assess the potential impact of risk on a firms value.
There are different factors which may affect the valuation of the
company. The different factors are as follows:-
Long term growth rate
Discount factor
Sales Revenue
Long Term Growth Rate:
Best Case ScenarioAssuming the current economic downturn will completely end after
2020, also assuming that the growth rate will be over 7.5% (at the
least), will boots the growth rate of Unilever, which is 3.6% in the
final year, to 4.8% after that.
Worst Case ScenarioAssuming that the long term growth has reduced from 3.6% to 2%.
Discount factor:
Best Case Scenario:As a best case scenario, it is assumed that the cost of equity is
discounted at 7.00%
Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%
g = growth rate after final year = 4.8%
Present Value at 10th year = 5101.64/(0.08-0.048) =€159426 m
Terminal Value = 159426*0.5000 =€79713 m
Enterprise Value (€ million) = NPV + Terminal Value= 26145.13+79713 = €105858 m
Debt (€ million) = 11753.79
Entity Value (€ million) = Enterprise Value – Debts
Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%
g = growth rate after final year = 3.6%
Present Value at 10th year = 5101.64/(0.08-0.048) =€ 115946 m
Terminal Value = 115946*0.5000 =€ 57973 m
Enterprise Value (€ million) = NPV + Terminal Value= 26145.13+57973 = € 84118 m
Debt (€ million) = 11753.79
Entity Value (€ million) = Enterprise Value – Debts
Worst Case Scenario:Assuming that the discounted was peculiarly 2 percentage point
higher (at 10%) than the usual 8%
Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%
g = growth rate after final year = 4.8%
Present Value at 10th year = 5101.64/(0.08-0.048) =€ 159426 m
Terminal Value = 159426*0.5000 =€ 79713 m
Enterprise Value (€ million) = NPV + Terminal Value= 27352.80+79713 = € 107065
mDebt (€ million) = 11753.79
Sales Revenue:
Best Case ScenarioAssuming that an optimistic economy has boots the sales of Unilever
on an average of 8% increase for the next 10 years.
Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%
g = growth rate after final year =3.6%
Present Value at 10th year = 5101.64/(0.08-0.048) =€ 115946 m
Terminal Value = 115946*0.5000 =€ 57973 m
Enterprise Value (€ million) = NPV + Terminal Value= 23969+57973 = €
81942 mDebt (€ million) = 11753.79
Worst Case Scenario:Assuming that the underlying sales will grow at only 3% which is a
drop of 25% of 2010 sales.
Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%
g = growth rate after final year =4.8%
Present Value at 10th year = 5101.64/(0.08-0.048) =€ 159426 m
Terminal Value = 159426*0.5000 =€ 79713 m
Enterprise Value (€ million) = NPV + Terminal Value= 29186+79713 = €
108899 mDebt (€ million) = 11753.79
Conclusion:Different analysis suggests that Unilever is under performing
compared to the market on the whole, however, this tread is not only
with Unilever but also across every industry of its type. When
Unilever is compared with its peer groups, even in the present
Present Value at the Nth year = CF/(r-g)CF = Actual final year FCF = € 5101.64 millionr = discounted rate = 8%
g = growth rate after final year =3.6%
Present Value at 10th year = 5101.64/(0.08-0.048) =€ 115946 m
Terminal Value = 115946*0.5000 =€ 57973 m
Enterprise Value (€ million) = NPV + Terminal Value= 24327+57973 = €
82308 mDebt (€ million) = 11753.79
economic conditions, its is either performing better or equal. Though
cost of equity, different scenarios are considered for effective and
ineffective performance of Unilever. It is therefore advised that the
shares of Unilever should be kept on hold, as it is certainly expected
to rise as the economy recovers. Unilever’s focus on emerging
markets and rapid expansions plans supposed to the advice of ‘Hold’.
Strong Buy Hold Strong Sell
Reference:
Brealey, R., and Myers, S. (1996). Principles of Corporate Finance, 5th edition. New York: McGraw Hill Publication.
Pike,R. And Neale,B. (2009). ‘Corporate finance and Investment – 6th edition’. Pearson Education Limited, Essex.
Puxty,A.G., Dodds,J.C., and Wilson,M.S. (1988).’Financial management: method and meaning’.VNR Series,pp 95.
Rappaport, A. (1998). Creating Shareholder Value: a Guide for Managers and Investors, 2nd edition. New York: The Free Press.
Online References:
BankOfEngland.co.uk [ND] http://www.bankofengland.co.uk/publications/fsr/2010/fsr28.htm [Accessed on 13.03.2011]
BBC.com (2010). “Market Data” http://news.bbc.co.uk/news/business/market_data/gilt/default.stm [Accessed on 14.03.2011]
CNNMoney.com (2010), Fortune Global 500, http://money.cnn.com/magazines/fortune/global500/2010/snapshots/6127.html [Accessed on 10.03.2011]
Damodaran (2010),’Country default spreads and Risk premiums’. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html [Accessed on 14.03.2011]
Ft.com (2011), Unilever PLC, http://markets.ft.com/tearsheets/performance.asp?s=uk:ULVR [Accessed on 11.03.2011]
Global Market Information Database [ND], https://www.portal.euromonitor.com/Portal/Magazines/Companies.aspx [Accessed on 13.03.2011]
HMRC.gov.uk (ND), Corporation Tax Rates, http://www.hmrc.gov.uk/rates/corp.htm [Accessed on 10.03.2011]
LondonStockExchange, (2011), Unilever PLC, http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B10RZP78GBGBXSET1 [13.03.2011]
Reuters.com[ND] http://www.reuters.com/finance/stocks/financialHighlights?symbol=UL.N [13.03.2011]
Unilever.com http://www.unilever.com/investorrelations/annual_reports/AnnualReportandAccounts2010/Winningthroughcontinuousimprovement.aspx [07.03.2011]
Appendix:
Appendix 1: Currency Conversions
International Currency1 USD 2006 2007 2008 2009 20101 GBP 0.367 0.514 0.492 0.716 0.6571 Euro 0.82 0.75 0.634 0.77 0.73
Appendix 2: Historic Long-Term Debts as percentage of total revenue
of Unilever
Unilever 2010 2009 2008 2007 2006Revenue € million)
44262 39823 40523 40187 39642
Long Term debts € million)
8003 8823 7289 5851 6183
% of revenue 18.08097239 22.15554 17.98732 14.55943 15.59709Average 17.67607103
Appendix 3: Historic Annual Incremental of Revenue of Unilever
Unilever 2010 2009 2008 2007 2006Revenue € million 44262 39823 40523 40187 39642
% increase 4.1% -1.7% .8% 1.4% 3.23%
Appendix 4: Historic Annual Increment of Operating Margin of
Unilever
Unilever 2010 2009 2008 2007 2006Operating Margin as (%) 14.3 12.6 17.7 13.1 13.6
Appendix 5: Historic Depreciation of Unilever
Unilever 2010 2009 2008Depreciation % 3.43 3.81 3.78
Average Depreciation for 3 years 3.68
Appendix 6: Historic interest paid as percentage of Profit After Tax of
Unilever.
In € m 2010 2009 2008 2007 2006
Profit After tax 4598 3659 5285 4136 5015
Interest paid 354 289 258 248 270% of Interest 7.699 7.898333 4.881741 5.996132 5.383848Avg Interest 6.37
Appendix 7: Historic capital expenditure of as percentage of revenue.
2010 2009 2008 2007 2006Revenue € million 44262 39823 40523 40187 39642
Capital Expenditure € million 1701 1258 1099 983 934Capital Expenditure as %
Revenue 3.843026 3.158978 2.71204 2.446065 2.356087Average 2.90323916
Appendix 8: Historic change in working capital.
Unilever
Sales Revenue
Current Assets
Current Liabilities
Working Capital
Working capital as % of total revenue
2006 39642 9501 11516 -2015 5.0829927852007 40187 9928 10924 -996 2.4784134172008 40523 11175 11970 -795 1.9618488272009 39823 10811 12881 -2070 5.1980011552010 44262 12484 12483 1 0.002259274
Average 2.943799382
Appendix 9: Historic free cash flow of Unilever.
Free Cash Flow in million GBP
2006 42222007 37692008 3236
2009 49412010 3365Average for 5 years
3906.6