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Rencap upgrades Unilever’s fair value



Renaissance Capital has raised its target price for Unilever Nigeria plc to N27.00 from N15.00 per share even as the investment banking firm maintained its ‘Hold’ rating on the stock. A review of the company’s stock performance also showed that it has gained 312 percent in the one year.


Our new target price reflects a lower cost of equity (our risk-free rate for Nigeria has fallen to 10.7 percent from 12.75 percent) and our lower estimate of the risk premium (down to 6.5 percent, from 7.5 percent), rolling our models forward for the next five years (2010-2014E); and our forecast average turnover growth of 30 percent from 2011 onward.”


Encouragingly, Unilever’s results were in line with the analysts’ expectations. Turnover for the period to December 31, 2009 increased 19 percent YoY to N44.5 billion against analysts’ forecast of N45.6 billion. Profit before tax (PBT) and profit after tax (PAT) were both up 58 percent to N7.1 billion and N4.1 billion, respectively. PBT came in 3 percent above the analysts’ expectation of N6.9 billion as underlying volume growth accelerated in 2Q and 3Q.Margins also improved and were underpinned by volume efficiencies, savings from lower supply-chain costs and a leaner organisational structure.


“Excluding an exceptional charge of N564 million (likely resulting from foreign exchange exposure/restructuring costs; no management guidance provided as yet), PAT came in line with our forecast of N4.6 billion.”


Meanwhile, the company also announced a final dividend of N1.07, amounting to a 100 percent dividend payout ratio with a yield of 4 percent, which is below Rencap’s forecast of N1.23 and lower than Unilever’s peers. In particular, PZ Cussons Nigeria plc achieved a dividend yield of 5.3 percent.


Improved operational efficiencies Unilever released impressive results in second quarter (2Q) and 3Q that strongly supported the year-end numbers, whereas in 4Q the company suffered sharp declines in both its top and bottom lines due to difficult market conditions.


“We expect 2010 to continue to be a challenging year for Unilever, given weak consumer spending and increased competition. Nevertheless, we think Unilever will be able to cope well, supported by robust volume growth, a higher operating margin, strong cash flow and effective cost-control measures.”


The joys of illiquidity Unilever UK owns about 50.4 percent of Unilever Nigeria, implying a free float of 49 percent (3.78 billion shares listed on the Nigerian Stock Exchange (NSE). Unilever Nigeria trading volume is 1.42mn units a day on average, valued at an average of $172,000, and it is one of the least volatile stocks on the NSE. The stock has gained 40 percent in the past three months and 312 percent in the past year.


Investment case “We think Unilever is richly priced and fully valued, with 2009 P/E and 2009 P/B of 24.5x and 14.9x, respectively, and with an expected total nominal return of 5.9%, on our estimates. 2010E implied multiples for EV/EBITDA and P/E are 11.2x and 16.9x, respectivel


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