Unilever double-upgraded at BofA on stronger underlying growth

Bank of America double-upgraded Unilever (UL) to Buy from Underperform in a note Thursday, citing stronger underlying growth prospects and improved market positioning.

The investment bank’s analysts expect Unilever’s organic growth to reach a compound annual growth rate (CAGR) of 4.6% from 2024 to 2027, driven by a more favorable product mix and market share gains.

This growth is anticipated to accelerate Unilever’s EPS CAGR to 10% for 2023-2026, up from just 1.5% during 2020-2023.

A key factor in this upgrade is the planned separation of Unilever’s Ice Cream business by 2025.

Bank of America believes this move will allow Unilever to concentrate on faster-growing categories and brands, enhancing returns and cash flow.

The analysts also highlight that the separation could mitigate risks if the Ice Cream business underperforms, with the Ice Cream division expected to trade at around 10 times its estimated 2025 EBITDA.

Bank of America notes that Unilever’s remaining business, referred to as “RemainCo,” is poised for superior performance, with a projected organic growth rate 60 basis points above the industry average, margins 170 basis points higher, and a 250 basis point advantage in EPS CAGR.

Additionally, the firm emphasizes that Unilever’s strategic focus on its “power brands” and innovation-driven campaigns will likely further boost volume and mix, contributing to the company’s long-term growth.

As a result, Bank of America has revised its price objective for Unilever to 5,600p, up from 3,800p, reflecting approximately 19% upside potential.

The analysts conclude that Unilever’s ongoing turnaround, initially sparked by the previous management team, is progressing well under the current leadership and is not yet fully reflected in the market’s valuation.