Broker tips: Unilever, Halma

After Unilever warned that organic revenue growth in the first half of the year will be below the bottom end of its 3-5% medium-term guidance range, analysts at RBC Capital Markets said it indicated the company will find it tough to hit revenue and margins targets.

The revelation, made at a conference in London, was a fairly marked turnaround from claims made at the time of the group's first-quarter results on 19 April that organic sales growth would be towards the lower end of that range.

The consumer goods giant expects to make up the miss in the second half, meaning that, on the surface, the issue seems to be related to timing more than anything else, RBC said, with the bulk of the blame being placed on Brazil, where the truckers' strike is expected to have a second-quarter impact of €150m. However, RBC analysts said this figure seemed to be "a lot".

Analysts estimated that Unilever's Brazil business accounted for roughly 4% of Unilever's global sales, noting that a €150m hit for the second quarter would equate to 25% of the firm's Brazilian sales in the quarter. "Are there other problems in Brazil?," the analysts pondered.

"We would regard an 11-day transport strike in Brazil as business as usual for a globally diversified FMCG conglomerate like Unilever. That management feels the need to lower market expectations for 1H, as a result, indicates that there's nothing in the rest of the group doing sufficiently better than management's previous expectations to compensate," the broker said.

RBC said the news was consistent with its view that Unilever's 2020 targets of 3-5% sales growth on a 20% EBIT margin were "a stretch".

"We think that Unilever's dual target on organic revenue growth and margin expansion deprives the company of the flexibility that is needed to succeed in the current challenging consumer environment."

"The risk is that Unilever will neglect marketing investment to hit the margin target, exacerbating top-line weakness and penalizing market share," the broker added as it reiterated its 'underperform' rating and £32 target price on the group.

Halma's last set of full-year results marked the 15th consecutive year of record revenue, EBIT and earnings per share, and despite the firm's dividend moving into its 39th consecutive year of growth above 5%, the standout metric to analysts at Berenberg was the group's 10% organic growth, nearly double the broker's forecast of 5.2%.

After hosting members of Halma's board, including chief executive Andrew Williams, for a sales teach-in last week, Berenberg left "as confident as ever" on the medium-term opportunities at the technology group, in terms of both sustainable organic growth and acquisition opportunities.

Berenberg felt Halma's management appeared to be bullish on further M&A opportunities and portfolio optimisation, something the broker noted that, despite the group showing strong organic growth, in order to sustain its "impressive" historical EPS compound annual growth rate of 13%, the firm would need to execute "larger and/or more frequent acquisitions".

"Our analysis suggests this is comfortably achievable over the medium term with c£1bn of investment required through to 2024. However, management's bullish tone on Tuesday has given us greater confidence," the broker said.

For investors concerned at the potential loss of control that could come with the growth of Halma, Berenberg explained how management had pointed to the optimisation of its portfolio executed over the past decade.

Thus, at present Halma had roughly 40 operating companies, a number that has not really changed in over a decade, and, although they are now larger, the span of control had "not greatly increased" and its "decentralised business model" of "mini-Halma's within Halma" would continue to ensure accountability - without the loss of entrepreneurship.

Berenberg reiterated its 'buy' rating on Halma and increased its price target from 1,410p to 1,570p.