WHAT IS UNILEVER’S INTRINSIC VALUE? | UNILEVER DCF MODEL (ULVR)

April 25, 2022 0 By bullheadedbear
LSE: ULVR Logo
Unilever's Intrinsic Value

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

Unilever Income Statement
ULVR Income Statement
ULVR 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 Income Statement
ULVR Income Statement
ULVR Income Statement

Unilever Revenue vs Margin

Unilever Margins
ULVR Margins
ULVR Margins

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

Unilever Balance Sheet - Assets
ULVR Balance Sheet - Assets
ULVR 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

Unilever Balance Sheet - Liabilities
ULVR Balance Sheet - Liabilities
ULVR 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

Unilever Balance Sheet - Equity
ULVR Balance Sheet - Equity
ULVR 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 Balance Sheet - 5-Year View
ULVR Balance Sheet - 5-Year View
ULVR Balance Sheet – 5-Year View
SharePad

Unilever Cash Flow Statement

Unilever Cash From Operations

Unilever Cash From Operations
ULVR Cash From Operations
ULVR 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

Unilever Cash From Financing
ULVR Cash From Financing
ULVR 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

Unilever Cash From Investing
ULVR Cash From Investing
ULVR 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

Unilever Cash Flow Statement - 5-Year
ULVR Cash Flow Statement - 5-Year
ULVR Cash Flow Statement – 5-Year

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 Rate23.5%
 Discount Rate4.9%
 Perpetual Growth Rate1.5%
 EV/EBITDA Multiple12.5x
 Transaction Date01/04/2022
 Fiscal Year-End31/12/2022
 Current Price41.92
 Shares Outstanding2,610
 Debt29,672
 Cash4,495
 Capex1,340
ULVR DCF Assumptions

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 Revenue Growth Forcast - Base Case
ULVR Revenue Growth Forcast - Base Case
ULVR Revenue Growth Forcast – Base Case

Unilever Cash Flow Forecast – Base Case DCF Model

Unilever Cash Flow Forecast - Base Case
ULVR Cash Flow Forecast - Base Case
ULVR Cash Flow Forecast – Base Case

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.

SharePad

Unilever DCF – EBITDA Exit

Unilever Terminal Value – EBITDA Exit

Final Forecast EBITDA (m)€12,873
EV/EBITDA Multiple12.5x
TERMINAL VALUE (m)€160,909
ULVR Terminal Value – EBITDA Exit

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)
ULVR Intrinsic Value – EBITDA Exit

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

Unilever Market vs Intrinsic (£)
ULVR Market vs Intrinsic (£)
ULVR Market vs Intrinsic (£)

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 Upside25.7%
 Internal Rate of Return (IRR)9.6%
ULVR Upside & IRR
ULVR Stock Price (£) vs IRR

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%

Finbox Get Started

Unilever DCF – Perpetual Growth Rate

Unilever Terminal Value – Perpetual Growth

Final Forecast FCFf (m)€8,742
Perpetual Growth Rate0.5%
TERMINAL VALUE (m)€201,447
ULVR Terminal Value – Perpetual Growth

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)
ULVR Intrinsic Value – Perpetual Growth

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

Unilever Market vs Intrinsic (£)
ULVR Market vs Intrinsic (£)
ULVR Market vs Intrinsic (£)

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 Upside55%
 Internal Rate of Return (IRR)14%
ULVR IRR – Perpetual Growth

Unilever Stock Price vs Internal Rate of Return

ULVR Stock Price (£) vs IRR

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

Unilever Revenue Forecast - Bear Case
ULVR Revenue Forecast - Bear Case
ULVR Revenue 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

ULVR Free Cash Flow Forecast – Bear Case

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

ULVR 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

Unilever Revenue Forecast - Bull Case
ULVR Revenue Forecast - Bull Case
ULVR Revenue 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

Unilever Free Cash Flow Forecast - Bull Case
ULVR Free Cash Flow Forecast - Bull Case
ULVR Free Cash Flow Forecast – Bull Case

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

Unilever Intrinsic Value vs Market Value - Bull Case
ULVR Intrinsic Value vs Market Value - Bull Case
ULVR 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

Unilever Valuation Overview
ULVR Valuation Overview
ULVR 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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