Why RBC sees limited upside for Unilever despite ice cream demerger?

RBC Capital Markets maintains an "underperform" rating on Unilever (LON:ULVR), despite the planned spin-off of its ice cream division, TMICC. The brokerage argues the demerger will not materially add value, potentially diluting earnings per share by 1-3% and reducing group EBITDA by 11-13%, while stripping Unilever of its most competitively advantaged business. RBC also expresses skepticism about Unilever's ability to manage stranded costs and achieve its 4-6% organic sales growth target, forecasting only 2% volume growth, suggesting the spin-off will not significantly improve growth prospects or valuation.

Analysis

RBC Capital Markets has reaffirmed an "underperform" rating on Unilever (LON:ULVR), setting a price target of GBp 3,900, which is 14% below the current GBp 4,689. The brokerage contends that the planned spin-off of the ice cream division, TMICC, will not materially enhance Unilever's value. Instead, it projects an 11-13% reduction in group EBITDA and a potential 1-3% trim in earnings per share over 2026-2027. RBC's fair value calculation of £38 per share further reinforces this cautious stance.

The analysis highlights that the demerger strips Unilever of its most competitively advantaged business, as the ice cream arm boasted a market leadership score of approximately 250 compared to just over 100 for the remaining portfolio. RBC also expresses concern regarding "stranded costs," representing about 13% of ice cream revenue, and doubts Unilever's ability to achieve significant margin improvement despite €800 million in productivity savings.

Furthermore, RBC questions Unilever's capacity to meet its midterm goal of 4-6% organic sales growth, forecasting only about 2% annual volume growth. This skepticism stems from the company's reduced scale and the continued presence of non-core brands, which still constitute roughly a quarter of sales. The overall assessment suggests the demerger will not meaningfully improve Unilever's growth prospects or valuation.

Key Decisions for Investors

• Investors should consider RBC's "underperform" rating and the projected 14% downside to the GBp 3,900 price target, factoring in potential EPS dilution and EBITDA reduction post-demerger.
• Monitor Unilever's progress on managing "stranded costs" and achieving its €800 million productivity savings, as these are critical for margin improvement and could impact future profitability.
• Evaluate the feasibility of Unilever's 4-6% organic sales growth target against RBC's more conservative 2% volume growth forecast, especially given the loss of its most competitive segment and the composition of its remaining portfolio.