Morning Note: Market news and updates from Unilever and AstraZeneca.
Market News
US equity markets fell heavily last night – S&P 500 (-2.3%), Nasdaq (-3.6%) – suffering their worst drop since December 2022 on concerns the AI frenzy may be overblown. Ford plunged postmarket after its adjusted EPS came in well below estimates.
The drawdown continued into Asia: Nikkei 225 (-3.3%); Hang Seng (-1.9%); Shanghai Composite (-0.5%). The yen surged more than 1%, blowing past 153 versus the dollar. Swaps show an 87% chance of the Bank of Japan hiking rates on 31 July. An unwinding of carry trades has also been supporting the Japanese currency.
The PBOC unexpectedly lowered the rate on its one-year policy loans to 2.3% from 2.5%, following a surprise reduction to a key short-term rate this week. The moves signalled greater support to the economy.
The FTSE 100 is currently trading 0.7% lower at 8,094. Rachel Reeves will tell international counterparts that Britain is “open for business” on her first overseas trip since taking office. The UK chancellor will attend the G-20 finance ministers’ meeting in Rio de Janeiro this week. Sterling currently trades at $1.2895 and €1.1882.
Two-year Treasury yields slid three basis points yesterday, while those on 10-year bonds edged higher to 4.24% – pushing their differential to the smallest margin since October 2023. Gold slipped back to $2,375 an ounce.
Global oil demand remains robust, with consumption averaging 103.6m barrels a day so far in July, up 1.7m b/d from a year ago, JPMorgan said. OECD commercial inventories fell 15m barrels last week, mostly driven by lower levels of crude. Brent Crude slipped to $80.50 a barrel.
Source: Bloomberg
Company News
Unilever has today released first-half results, with profitability coming in ahead of market expectations. The productivity programme is underway, and the separation of the Ice Cream business is on track. The company is now more upbeat on the outlook for full-year margins and has raised its dividend for the first time since 2020. In response the shares have been marked up by 6% in early trading.
Unilever is one of the world’s leading suppliers of consumer goods, with annual sales of around €60bn across five business groups: Beauty & Wellbeing (21% of 2023 sales), Personal Care (23%), Home Care (20%), Nutrition (22%), and Ice Cream (13%). Its products are low-ticket, repeatable purchases, with 3.4bn people using a Unilever brand every day. With unique routes to market, the company has an unrivalled emerging market presence and generates more than half of its sales from those parts of the world expected to experience strong long-term growth in demand. In particular, the group’s 62% holding in India-listed Hindustan Unilever Limited provides exposure to the largest consumer goods company in India.
At the end of last year, new CEO Hein Schumacher set out an action plan to address the gap between the group’s past performance and its potential. The focus is on:
1. faster growth: focus first on 30 Power Brands (75% of turnover), scale multi-year innovation, increase brand investment and returns, and selectively optimise the portfolio.
2. greater productivity and simplicity: to build back the gross margin and drive the benefit of the new organisational structure. The group is confident it can return to pre-covid level of gross margin (44%) – in time, this is seen as a floor not a ceiling.
3. a stronger performance culture: there has been a raft of senior management changes and a new incentive framework to better align with shareholders.
In March, the group announced an acceleration of the plan through the separation of its ice cream unit and the launch of a productivity programme to drive faster growth and a higher margin.
Ice cream accounts for 13% of group sales and has distinct characteristics compared with Unilever’s other operating businesses. These include a supply chain and point of sale that support frozen goods, a different channel landscape, more seasonality, and greater capital intensity. A demerger is the most likely separation route, although other options will be considered to maximise returns for shareholders. The group’s remaining four units have complementary routes to market, and/or R&D, manufacturing and distribution systems, across both developed markets and Unilever’s extensive emerging markets footprint.
The productivity programme has been accelerated and is anticipated to deliver total cost savings of around €800m over the next three years, more than offsetting estimated operational dis-synergies from the separation of Ice Cream. This does not include the tax dis-synergies given it is unclear at this stage what form the separation will take. Overall, these actions will leave Unilever with a structurally higher margin. Post separation, the aim is to deliver mid-single digit underlying sales growth (vs. the previous target of 3%-5%) and modest margin improvement. The group will continue to target total shareholder returns in the top third of the peer group.
Back to today’s results. In the first half of 2024, turnover grew by 2.3% to €31.1bn, in line with market expectations. Underlying sales growth (USG) – adjusted for the impact of currency fluctuations (-1.1%) and M&A (-0.7%) – was 4.1%. Q2 was +3.9%, slightly behind the 4.2% market forecast.
Volume grew by 2.6%, a slight improvement from 2.2% in the previous quarter, while underlying price growth of 1.6% continued to moderate in line with expectations.
The 30 Power Brands grew by 5.7%, driven by a 4.0% increase in volume. The other brands saw a sequential volume improvement to -1.1% in Q2, up from -2.0% in Q1.
In emerging markets, USG was 5.1%, with good results in Latin America offset by China. Developed markets grew by 2.8%, with North America and Europe up 3.4% and 3.5% respectively.
All five businesses reported growth: Beauty & Wellbeing (+7.1% to €6.5bn); Personal Care (+5.6% to €7.0bn); Home Care (+3.3% to €6.3bn); Nutrition (+3.2% to €6.7bn); and Ice Cream (+0.6% to €4.6bn).
As expected, the group’s turnover-weighted market share movement, which measures its competitive performance within the footprint in which it operates, remained largely unchanged on a rolling 12-month basis. The company expects a sequential improvement of the share trend over time reflecting increasing benefit from the Growth Action Plan.
Gross margin increased by 420bps. This strong progression reflects positive contributions from volume leverage, mix and net productivity but also factors that will not repeat in the second half such as, a low prior year comparator affected by high input costs, and carry-over pricing from a period of higher inflation.
The group maintained strong investment in its brands, with marketing investment up 180 bps to 15.1% of turnover. Underlying operating profit improved 17.1% to €6.1bn, with a 250bps margin improvement to 19.6%, well ahead of market expectations. Underlying EPS grew by 16.3% to €1.62.
Free cash flow slipped slightly to €2.2bn, reflecting seasonal working capital outflow, and net debt edged up from €23.7bn to €25.2bn. The group has commenced a €1.5bn share buyback programme, with the first €850m tranche expected to be completed by the end of August. The quarterly dividend has been raised for the first time since 2020, by 3% to €0.4396, although in sterling terms it is unchanged at 36.96p.
The group still expects underlying sales growth to be within the multi-year range of 3% to 5%, with most of the growth being driven by volume. The underlying operating margin for the full year is now expected to be at least 18%. This compares to the previous guidance for a modest improvement versus last year’s 16.7%.
Source: Bloomberg
AstraZeneca has today released strong results for the first half of 2024 and upgraded its guidance for the full year. In response, the shares are trading slightly lower against a weak overall market backdrop.
AstraZeneca (AZ) is a global, science-led biopharmaceutical company. The main growth driver has been the group’s key Oncology franchises (including Tagrisso, Lynparza, Enhertu, Imfinzi, and Calquence), which have been supplemented by the other growth platforms of Respiratory & Immunology (R&I), Cardiovascular, Renal, & Metabolic diseases (CVRM), and Vaccines & Immune Therapies (V&I).
The $39bn acquisition of Alexion in 2021 transformed the group’s exposure to rare diseases, of which there are over 7,000 known today, with only 500 or so having approved treatments. Demand for medicines for rare diseases is forecast to grow by a low double-digit percentage. The group’s position has been further enhanced by the purchase of a portfolio of early-stage rare disease gene therapy programmes and enabling technologies from Pfizer and the acquisition of Amolyt Pharma, which expands the group’s late-stage pipeline and bone metabolism franchise.
AZ currently invests more than 20% of sales in R&D and uses partnerships to gain access to innovative technology. The group has an attractive pipeline of potential new products, the success or failure of which will drive future profitability and the share price. In 2023, the company started 27 Phase III trials across 18 medicines for 10 potential blockbuster assets.
The group’s ambition is to deliver $80bn of revenue by 2030, up 8.3% p.a. from a 2023 base of $45.8bn. This will be driven by growth in its existing portfolio through geographic expansion and follow-on indications, as well as new products currently in late-stage development, offset by loss of patent exclusivity in some existing products. The group expects to launch 20 new medicines before the end of the decade, with many of the products having the potential to generate more than $5bn in peak year revenue. By 2030, the company will seek to drive sustained growth by continuing to invest in transformative new technologies and platforms that will shape the future of medicine.
In the first half of 2024, the group’s total revenue increased by 18% at constant exchange rates (CER) to $25.6bn, driven by an 18% increase in product sales. By therapy area, product sales grew 22% in Oncology, 22% in CVRM, 22% in Respiratory & Immunology, and 15% in Rare Diseases.
The aim is to generate a mid-30s core operating margin by 2026, versus the 2023 a margin of 32%. Beyond 2026, the margin will be influenced by portfolio evolution and the company will target at least the mid-30s percentage range. In the first half, core operating expenses remained well controlled, with R&D and SG&A up 10% and 6% respectively. The operating margin fell by three percentage points to 33%. Core EPS grew by 5% to $4.03.
Recent news flow on the pipeline, in terms of new data and product approvals, has been encouraging. There were positive read-outs for Imfinzi in combination with chemotherapy in muscle-invasive bladder cancer (NIAGARA), Calquence in untreated mantle cell lymphoma (ECHO), and Enhertu in HR-positive, HER2-low metastatic breast cancer (DESTINY-Breast06).
AZ has a robust balance sheet and generates strong free cash flow. The company is committed to a progressive dividend policy, intending to maintain or grow the payout each year. Underlining the company’s confidence in its performance and cash generation, the 2024 dividend indication is $3.10, up 7%, equating to a 2% yield at the current share price and exchange rate. Today, the group has declared an interim payout of $1.00 or 77.6p.
The guidance for 2024 has been raised with both total revenue and Core EPS now expected to increase by a mid-teens percentage at CER versus a previous target to grow by a low double-digit to low-teens percentage.
We believe the outlook for the pharmaceutical sector remains mixed. Although the business provides some protection against macroeconomic uncertainty and R&D productivity is expected to increase with the help of AI, concerns over drug pricing are likely to remain a headwind especially at a time when governments are looking for ways to reduce debt levels. However, with a pipeline of innovative and rare products to address unmet patient needs, that can justify higher pricing, we believe AZ is well placed with above average revenue and earnings prospects versus the large cap pharma peer group. This has been reflected in the strong long-term performance of the shares.
Source: Bloomberg