Nigeria | Unilever Nigeria Plc FY 2015 and Q1 2015 Earnings Update

LAGOS, Nigeria, Capital Markets in Africa — Unilever Nigeria Plc (“Unilever” or the “the Company”) remains one of the largest Fast Moving Consumer Goods (FMCG) Companies in Nigeria, with products, ranging from Knorr in the food stratum to Close up in the personal care division, which have more or less become household names. The Company remains the oldest surviving manufacturing organization in Nigeria. The company released its FY:2015 result in which turnover grew modestly by 6.0% (in line with our 3.0% FY:2015 estimate) while PAT declined significantly by 50.6% (better than our forecast of 81.0%). Unilever also released its Q1:2016 result (on 15/04/2016) which showed much more impressive numbers as revenue grew 12.5% while PAT surged 76.4% amidst the current macroeconomic challenges that have weighed on corporate scorecards of players in the FMCG classification.

Uptrend Sustained in Gross Revenue; up 6.2% and 12.5% Y-o-Y in FY:2015 and Q1:2016 Respectively.
Despite the economic crunch currently affecting companies in the Consumer goods space, trickling into lower discretionary spending by individuals, the robust product portfolio of Unilever and the business model being implemented have ensured that the company sustains the recent growth momentum. Turnover improved 6.2% Y-o-Y from N55.8bn in FY:2014 to N59.2bn  in FY:2015 which was broadly in line with our forecast of N57.4bn (-3.0% variance). However, PAT fell 50.6% from N2.4bn in FY:2014 to N1.2bn in FY: 2015 owing to the 64.7% increase in net finance cost. In Q1:2016, Unilever posted a quite impressive result, taking into cognisance the overhanging macroeconomic conditions in the period which took its toll on the economy as turnover grew 12.5% Y-o-Y to N16.8bn from N14.9bn in FY:2014. We attribute this impressive performance to the necessity nature of Unilever products as most of the brands are relatively price and income inelastic though the competition in the space is also huge. In our view, Unilever’s leading brands and dominance within the FMCG space is a positive for its volume sales.

Higher Financial Leverage Pressuring Earnings
Given the tight operating environment in 2015, Unilever’s cost of sales inched higher by 7.3% Y-o-Y to N38.2bn from N35.6bn in the prior period; though the cost of sales margin slightly rose 0.6% to 64.5% in FY:2015. In Q1:2016, cost of sales also rose 9.1% but the cost of sales margin moderated to 64.1% Y-o-Y. In FY:2015, total OPEX grew5.6% Y-o-Y to N16.5bn despite cost cutting measures embarked on due to the prevailing macroeconomic conditions whereas OPEX margin was flat as it settled at 27.8% against 27.9% in the prior year. In Q1:2016, this trend persisted as OPEX for the period was up 18.2% Y-o-Y though OPEX margin improved in the period under review.

It is noteworthy that Unilever’s performance is still relatively stable at the operational level given the operating profit which was marginally down by 1.0% Y-o-Y in FY:2015 and up 17.6% in Q1:2016. Whilst the Company can still strive in improving its operational efficiency, a major drag on performance in FY:2015 (as has historically been the case) was the massive jump in finance cost, up 66.0% Y-o-Y despite the 37.5% decline in total borrowings for the year. Unilever remains highly levered as 62.9% of its FY:2015 operational profit went into finance cost. Company’s leverage ratio as at Q1:2016 stands at 5.5x implying that approximately 82.0% of the business is financed by debt and less than 20.0% by equity. Consequently, PBT declined massively by 38.4% in FY:2015 while PAT also declined by 50.6%. Q1:2016 profitability performance was, however, better owing to stronger revenue growth as PBT and PAT were up by 64.1% and 76.4% respectively.

EPS down to N0.32; Full-Year Dividend of N0.05
In terms of return, Unilever’s ROAA fell to 2.5% in FY:2015 from 5.4% in the previous year, while ROAE declined to 15.4% from 28.7% in FY:2014. This served as a reflection of the tougher operating environment which affected the overall performance of the company in FY:2015 and impacted on investors’ return on equity. In Q1:2016, following the improved performance recorded across the board, Unilever’s annualised ROAA  settled at 5.7% while annualised ROAE improved to 33.1%, signalling an improvement in company’s profitability ratios. Unilever’s EPS as at FY:2015 fell to N0.32 from N0.64 in FY:2014, hence, a dividend payment of N0.05 (5 kobo) was proposed for the year at an implied yield of 0.2% as at 22/04/2016.

Outlook and Recommendation
Unilever still remains one of the biggest players in the FMCG classification, hence, we believe that the Company should be able to weather the storm of macroeconomic challenges currently affecting corporate performance. This is further buttressed by the impressive Q1:2016 results recently released. However, we still remain somewhat bearish on the valuation of the Company, as the current macroeconomic challenges, most especially forex related operations, are expected to take a toll on overall performance. More so, the level of interest burden of Unilever given its average 2-year coverage ratio of 1.9x is of great concern to us as the profitability margins of the Company continues to be impaired. Hence, we employed a blend of absolute and relative valuation techniques to get a fair value for Unilever and arrived at a target price of N23.39 and judging by the current price of N29.25 (22/04/2016), we see a 20.0% downside. The stock is currently trading at trailing P/E and P/BV of 66.5x and 12.4x as against peer average of 15.57x and 3.5x respectively which suggest the stock is overpriced, and as such we retain our “SELL: recommendation.

Source: Afrinvest (West Africa) Limited Research Team