Unilever Nigeria Plc Gross Margin Contracted in Q3 2016 Results


Wednesday, October 26, 2016/ 7.05pm /FBNQuest Research

Event: Unilever Nigeria reports Q3 2016 results
Implications: Modest downward adjustments to consensus estimates likely
Positives: Sales up 26% y/y; opex declined 21% y/y
Negatives: Gross margin contracted -1187bps y/y; net finance costs were up 33% y/y

This afternoon, Unilever Nigeria (Unilever) reported Q3 2016 results which showed that sales of N17.6bn were up 26% y/y. While PBT of N24m was down by -78% y/y, PAT of N474m advanced by 755% y/y due to a tax credit of N450m during the quarter.

Despite the double-digit sales growth and opex declining by -21.1% y/y, these were not strong enough to offset a -1,187bp y/y gross margin contraction to 24.7% and a 33% y/y increase in net finance costs, hence the y/y decline in PBT.

On a sequential basis, sales grew by 14% q/q. While PBT fell by -65% q/q, PAT grew by over 800% q/q owing to the tax rebate. The positive q/q sales growth, along with a -16% q/q decline in opex, was offset by a -317bp q/q gross margin contraction and a 400% q/q rise in net interest expense.

Sourcing of fx for importing raw materials continues to pose a challenge for Unilever, but we believe this was much worse for its smaller competitors and those companies which import the majority of their raw materials, hence Unilever being able to grow its topline by 26% during the quarter. We note that competitor PZ Cussons also grew its topline by 12% y/y in Q1 2017 (end August).

Despite the healthy sales growth, the devaluation of the naira appears to have taken its toll; we believe this was the main reason for the weak performance on the gross margin line following the CBN’s new flexible exchange rate policy adopted at the end of H1 2016.

Compared with our estimates, Q3 sales were ahead by 12%, while PBT was behind by 88%, due to negative surprises on the gross margin and net interest expense lines.

On a 9M basis, sales of N50bn grew by 17%. PBT and PAT of N1.5bn and N1.6bn advanced by 650% y/y and 1,012% y/y respectively, due to base effects. 9M sales and PBT are on track to meeting consensus’ FY estimates of N64bn and N2.1bn respectively.

Year to date, Unilever shares have gained 11.1%, significantly outperforming the NSE ASI which has shed -5.3%. In the last 3 months, the shares are up 45.5% (vs. NSEASI: -3.0%) which we struggle to justify. They are trading at a significant premium to Unilever’s peers in the consumer goods sector. We believe the shares are overpriced and expect to see a sell-off following these Q3 numbers.

We rate the stock Underperform. Our estimates are under review.

Unilever Nigeria Q3 2016 results: actual vs. FBNQuest Research estimates (N millions)

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