WHAT IS UNILEVER’S INTRINSIC VALUE? | UNILEVER DCF MODEL (ULVR)
What is Unilever’s intrinsic value / fair value? The below fundamental analysis and discounted cash flow forecast aim to help us understand if Unilever’s stock price is good value.
Is Unilever a good investment? Many factors will determine if a stock is a good investment; this analysis looks at the historical financials, forecasts based on management and analysts’ projections and personal assumptions. The following information is not financial advice, nor is it a recommendation to buy or sell Unilever.
The data for the following analysis, including the dcf models, comes from a combination of SharePad, Finbox, and the Unilever investor relations website. Additionally, the dcf model uses personal assumptions, which are shared below.
See also our post on Unilever’s relative valuation – comparable analysis.
Table of Contents
Unilever Fundamental Analysis
Unilever Discounted Cash Flow Modelling
Unilever DCF Scenario Analysis
Unilever Stock Valuation Summary
Unilever Fundamental Analysis
Unilever Income Statement
The financial data and models below are based on Unilever’s reporting currency, euros. We then convert to pound sterling for the intrinsic value per share, aligning with the trading currency.
Unilever 2021 Income Statement
Cost of sales is predominantly made up of raw & pack and goods purchased for resale. The gross profit margin has declined from 44% in 2019 to 42.3% in 2021. Operating expenses include the usual marketing costs, research & development and general overheads.
Unilever Year Income Statement – 5-Year View
Unilever Revenue vs Margin
Revenue is up versus the previous three years but down vs 2017. EBITDA margin has been on a steady decline since 2018, from 22.9% to 21.7%. Net income margin of 12.3% is an increase vs the previous couple of years.
Unilever Balance Sheet
Unilever 2021 Balance Sheet – Assets
Goodwill and Intangibles constitute a significant proportion of total assets. A considerable amount of intangible assets comprises five brands: Horlicks, Knorr, Paula’s Choice, Carver Korea and Hellmann’s. Paula’s Choice is also a pivotal contribution to the increase in goodwill as it was acquired in 2021.
Unilever Balance Sheet – Liabilities
Debt is the main contribution to liabilities, with long-term and short term debt increasing. Long-term debt increased slightly, but short-term debt increased significantly from €1.9 billion to €4 billion. Debt to EBITDA currently stands at 2.6x, at the top end of an acceptable level. Net Debt is one of the Unilever Multi-year Financial Framework priorities, where management has targeted Net Debt to EBITDA of 2x.
Unilever Balance Sheet – Equity
Shareholders equity increased in 2021, primarily driven by a significant increase in retained earnings. However, it is also worth noting, additional paid-in capital reduced year-on-year due to the High Court of Justice of England and Wales approving the reduction. The other common equity consists of a unification reserve. This is due to Unilever N.V. (the former parent company of Unilever Group) merging into PLC and then dissolved.
Unilever Balance Sheet – 5 Year View
Unilever Cash Flow Statement
Unilever Cash From Operations
Although net income increased vs the previous couple of years, cash from operations was lower. This was mainly driven by an increase in income tax paid and changes in working capital.
Unilever Cash From Financing
Negative cash from financing was the most significant contributor to the decline in cash at -€7 billion. €4.7 billion of debt was issued vs €3.5 billion of debt repaid, further increasing debt. €3 billion was spent on share buybacks, as well as €4.5 billion paid to shareholders via dividends.
Unilever Cash From Investing
Cash from investing also contributed to a decline in cash at -€3.2 billion. This was driven by €1.3 billion of CAPEX and €2.1 billion of acquisitions.
Unilever Cash Flow Statement – 5 Year View
As mentioned, the cash balance has declined verse the previous two years, driven by negative cash from investing and negative cash from financing.
Unilever Discounted Cash Flow Modelling
Unilever DCF – Assumptions & Base Case FCF
Unilever DCF Assumptions
| Tax Rate | 23.5% |
| Discount Rate | 4.9% |
| Perpetual Growth Rate | 1.5% |
| EV/EBITDA Multiple | 12.5x |
| Transaction Date | 01/04/2022 |
| Fiscal Year-End | 31/12/2022 |
| Current Price | 41.92 |
| Shares Outstanding | 2,610 |
| Debt | 29,672 |
| Cash | 4,495 |
| Capex | 1,340 |
The above are the personal assumptions used in the DCF model, also used are the financial details for the 2021 fiscal year-end. Below you will find the DCF model based on the base case scenario, which assumes revenue growth over the next five years of 5%, 3%, 3%, 3%, 3%. These assumptions are lower than the average analysts’ forecasts which start with 7% growth in 2022, followed by an average of 3.4% growth over the following four years. The comparisons between our bear case, base case & bull case scenarios are detailed later in this analysis.
Unilever Base Case Revenue Growth Forecast
Unilever Cash Flow Forecast – Base Case DCF Model
According to our base case model, free cash flow will decrease slightly in 2022 to €7.7 billion, then gradually increase to €8.7 billion in 2026.
Unilever DCF – EBITDA Exit
Unilever Terminal Value – EBITDA Exit
| Final Forecast EBITDA (m) | €12,873 |
| EV/EBITDA Multiple | 12.5x |
| TERMINAL VALUE (m) | €160,909 |
The base case model forecasts EBITDA in 2026 of €12,873 million. Using an EV/EBITDA multiple of 12.5x (the ten-year average), we get a terminal value of €160,909 million.
Unilever Intrinsic Value – EBITDA Exit
| Enterprise Value (m) | €162,651 |
| Plus: Cash (m) | €4,495 |
| Less: Debt (m) | €29,672 |
| Equity Value (m) | €137,474 |
| EQUITY VALUE / SHARE | €52.68 (£44.25) |
Based on the base case forecasted cash flows and a discount rate (WACC) of 4.9%, we get an enterprise value of €162,651 million. Then, add cash of €4,495 million and minus debt of €29,672 million; the equity value is €137,474 million. Finally, if we divide the equity value by the number of outstanding shares, we get the equity value per share of €52.68, or £44.25.
Unilever Intrinsic Value vs Market Value- EBITDA Exit
Based on the model assumptions and using the EBITDA exit multiple, the intrinsic value for Unilever is £44.25. Providing a potential upside of £9.04 per share.
Unilever Investment – Internal Rate of Return (IRR)
| Target Price Upside | 25.7% |
| Internal Rate of Return (IRR) | 9.6% |
At the current market share price of £35.22, there is an internal rate of return of 9.6%. If the stock price dropped 20% to £28.17, the IRR would be 14.2%. If the stock price increases 20% to £42.26, the IRR would be 5.8%
Unilever DCF – Perpetual Growth Rate
Unilever Terminal Value – Perpetual Growth
| Final Forecast FCFf (m) | €8,742 |
| Perpetual Growth Rate | 0.5% |
| TERMINAL VALUE (m) | €201,447 |
The base case model forecasts free cash flow in 2026 is €8,742 million. Using a perpetual growth rate of 0.5%, we have a terminal value of €201,447 million.
Unilever Intrinsic Value – Perpetual Growth
| Enterprise Value (m) | €195,001 |
| Plus: Cash (m) | €4,495 |
| Less: Debt (m) | €29,672 |
| Equity Value (m) | €169,824 |
| EQUITY VALUE / SHARE | €65.08 (£54.66) |
Using the base case forecasted cash flows and a discount rate (WACC) of 4.9%, we get an enterprise value of €195,007 million. Add cash of €4,495 million and minus debt of €29,672 million, and we end up with an equity value of €169,824 million. If we divide the equity value by the number of outstanding shares, we get the equity value per share of €65.08, or £54.66.
Unilever Intrinsic Value vs Market Value
Based on the model assumptions using the perpetual growth rate, the intrinsic value is £54.66, which is £19.45 higher than the market value. Using the growth exit model, the intrinsic value is higher than when using the EBITDA exit multiple.
Unilever Investment – Internal Rate of Return (IRR)
| Target Price Upside | 55% |
| Internal Rate of Return (IRR) | 14% |
Unilever Stock Price vs Internal Rate of Return
With a current market share price of £35.22, there is an internal rate of return of 14.1%. If the stock price dropped 20% to £28.17, the IRR would be 18.9%. If the stock price increases 20% to £42.26, the IRR would be 10.3%.
Unilever DCF Model – Scenario Analysis
The above DCF model was for the base case scenario. Below is an overview of the bear case and bull case scenarios.
Unilever DCF – Bear Case Scenario
Unilever Revenue Growth Forecast – Bear Case
For the bear case scenario, we have set the revenue growth in 2022 to be 3%, followed by annual growth of 1% for the next four years. This growth is significantly below estimates made by the analysts and what management has guided.
Unilever Bear Case Free Cash Flow Forecast
Bear case free cash flow forecast starts at €7,274 million in 2022, a reduction from 2021. A 1% annual revenue growth sees a 2026 unlevered free cash flow increase to €7,562 million, which is lower than the 2021 year-end free cash flow.
Unilever Intrinsic Value vs Market Value – Bear Case
The current market value is £35.22. For the bear case scenario, using the EBITDA exit multiple for terminal value, the intrinsic value is £37.62. Therefore, £2.40 higher than the current market value. If we use the perpetual growth rate for the terminal value, the intrinsic value is £46.58, which is £11.36 higher than the current market value. Again, the growth rate model provides a significantly higher intrinsic value than the EBITDA exit model for Unilever.
Unilever DCF – Bull Case Scenario
Unilever Revenue Growth Forecast – Bull Case
The bull case has revenue growth of 8% in 2022, followed by 5% in 2023, 4% in 2024 and 3% in 2025 & 2026. This forecast is at the top end of the analysts’ forecasts.
Unilever Bull Case Free Cash Flow Forecast
The bull case free cash flow forecast starts at €7,886 million in 2022 and increases to €9,256 million in 2026.
Unilever Intrinsic Value vs Market Value – Bull Case
The bull case EBITDA exit DCF model provides an intrinsic value of £47.23, £12.01 higher than the current market value. Using the perpetual growth rate DCF model, the intrinsic value is £58.25, £23.04 higher than the current market value.
Unilever DCF Valuation Overview
Is Unilever a good investment?
Is Unilever a buy at current valuations?
The current stock price is at the lower end of the 52-week trading range and the analysts’ price targets.
All models returned an intrinsic value above the current market value; however, Unilever must maintain or improve current net debt levels and grow revenue.
There are many elements to consider when understanding if a stock is a good investment. This post only aims to understand Unilever’s intrinsic value. If you are interested in Unilever’s relative value and its comparison to competitors, click here for our other post – Unilever’s Relative Valuation.
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I/we have open long positions in Unilever. I/we do not intend to make any changes to our position in the coming weeks but have the right to do so if situations change or further information becomes available.
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