• Unilever Nigeria Plc “Unilever” posted N26.9 billion in H1 2012 revenue; unchanged from H1 2011. However, Q2 2011revenue dipped 9% QoQ (-5% YoY) to N12.8 billion reaffirming the recent pressure on top line growth across the consumer goods sector; which players continue to attribute to tensions in Nigeria’s northern region. More than the tensions in the north, we believe pressure on consumer discretionary spending coupled with the constricted bank lending to the real sector account for the recent pressure on revenue.
Eases credit policy in a difficult operating year as finance cost rises
• The 12% YTD rise to N6.3 billion in trade and other receivables amid flattish revenue suggests Unilever eased credit terms to its distributors to support product uptake. The company’s dependence on credit sales possibly led to the decision to resort to short-term borrowing (stood at N4.9 billion in H1 2012 from a nil position in Q1 2012 and Q4 2011) to augment its working capital needs; hence the 60% YoY rise in finance cost to N184 million in H1 2012.
Gross margin recovers but depreciation costs weigh on efficiency
• Petrochemicals prices – a core inputs for Unilever’s HPC business and intermediates from crude oil – abated alongside crude oil prices in Q2 2012, providing support for the 100bps expansion in gross margin to 36% in H1 2012 from Q1 2012. Gross margin rose 300bps QoQ to 38% in Q2 2012.
• Fixed assets rising N2.2 billion to N17.4 billion during the quarter likely reflect ongoing expansion as well as upgrades at its production facilities. Depreciation cost associated with the 15% QoQ rise in fixed assets–possibly explains the 11% QoQ rise in operating costs to N3 billion, although H1 2012 operating costs declined 6% YoY . This led to a marginal (25bps) YoY deterioration in operating margin to 14.9% in H1 2012. Lower taxes support earnings
• PBT declined 3% YoY to N3.8 billion in H1 2012. However, it would appear that the tax holiday on the recent additions to its fixed assets possibly explains the 12% effective tax rate in Q2 2012- compared to the 37% in Q1 2012–which puts effective tax for H1 2012 at 26% compared to the 31% in H1 2011. Consequently, PAT rose 5% YoY to N2.8 billion in H1 2012 and was 4% ahead of our forecast.
• Whilst pre-tax margin dipped 6bps to 14.2% in H1 2012 from H1 2011, net margin expanded 3bps between these periods. This performance puts annualized ROE at 67%, well ahead of the 47% five-year average, suggesting that capacity expansion and modernization in recent years has had a favourable impact on returns. This brings it within range of the 80% levels where Nestle Nigeria Plc, the most profitable quoted consumer goods company, currently sits
Tax gains, efficiency to offset difficult operating terrain in H2 2012
• In view of the impact of recent monetary tightening on lending and access to finance for distributors, we review our 13% YoY growth forecasts. We now expect FY12 revenues of N57.5 billion, a 5% YoY growth. This is in addition to further pressure on consumer spending–we already anticipate will weigh on revenues— as the government revised electricity tariff higher at the start of H2 2012 and will be increasing taxes on a number of imported food items during the period. We now have doubts that the demand Unilever envisaged in its recent capacity expansion will be fully available in the near term and have adjusted our utilization assumptions slightly lower with adverse implications for revenues and margins. Nevertheless, recent softening in prices of energy commodities amid expectation for a global economic deceleration informs our decision to maintain our gross margin expectation for FY 2012 at 34%.
• Despite evident efficiency gains from recent investments into fixed assets, we maintain the ratio of operating costs to revenues at 22% given our expectations for lower utilization. However, we could see another round of staff rationalization-both on the back of improved process and idle capacity--and consequently could see the company incur another one-off restructuring charge. We also annualized the current finance charge to N370 million for FY 2012.
We revise our fair value higher but maintain our rating
• Following these revision to our forecasts, we update our fair price for Unilever 12% higher to N19.63 which would still put yesterday’s close at a significant 74% premium. The forward PE at 23x is just slightly above peer average in other emerging markets at 22x. However, we maintain our SELL rating on the stock.
ARM ratings and recommendations
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