Unilever Nigeria Plc Rated a SELL; Gross and PBT Margins Contract QoQ in Q2’16


Wednesday, July 20, 2016 2:48pm /InvestmentOne Research

Q2 2016 results highlight 

·         Mixed  sales performance : down -7.7%% q/q; up +12.2% y/y

·         Mixed PBT and PAT: down -90% q/q; up +100% y/y on lower-base effect.

·         Contracting margins : Gross and PBT margin  contracted by  over -800bps q/q ; mixed y/y


UNILEVER NIGERIA Plc (UNILEVER) recently released its unaudited Q2 2016 results which showed that PBT and PAT grew by over 100% y/y to c.N68mn c.N52mn respectively. We highlight that this is largely due to lower-base effect given the loss before and after tax of c.-N770mn and c-N504mn in Q2 2015.

The growth in bottom line was driven by a combination of over 600bps and 300bps y/y expansion in both PBT and PAT margin, a +12% y/y uptick in sales, and a -824bps contraction in opex/sales which offset the over 600bps contraction in gross margin.

However, sequential trend was less-inspiring reflecting the challenging macro situation in Q2:2016. Sales were down by over -7% q/q while PBT and PAT declined by -95% q/q  each. Margin wise, Unilever’s gross margin was down by over -800bps q/q suggestive of increased pressure on input costs from difficulty in accessing FX while both PBT and PAT margin of 0.4% and 0.3% q/q contracted by -800bps and -600bps q/q respectively.

In addition, we highlight that the dismal bottom-line figures in Q2 came inspite of c.-36% q/q decline in interest expense to c.N349mn, and a c.+186% q/q increase in finance income to c.N164mn.

While opex/sales ratio expanded marginally by 167bps q/q, we point out the jump in Brand and Marketing expense from c.N900mn in Q1 to c.N2bn. This may not be unconnected with the drive to enhance the company’s leading position in its core segments through advertisement and publicity.

Overall, the result was headlined by contracting margins, weaker sales and pressure on input costs from acute shortage of FX, and higher energy costs.

In conclusion, while the company continues to maintain its leading market position in core business segments given the recent industry data, we highlight that the future remains dim given the challenge to topline and margin performance from macro headwinds (rising inflation, squeeze in disposable income, volatility in exchange rate as well as  higher energy costs).

Going forward, we see potential benefit to the company from ease of access to FX for import of material input following the new FX regime and growth in its core segments such as the home care and the food segment (which grew by over +35% and +21% in Q2).

Our models are under review. We rate UNILEVER a SELL

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