Unilever Nig Plc Delivers a Cosmetic PAT in Q3-2016


Thursday, October 27, 2016 4:40 PM / Cordros Capital

Yesterday, UNILEVER released results for nine months and third quarter ended September 2016. The key features of the third quarter result are:

(1) 25.9% y/y and 13.5% q/q revenue growth;

(2) elevated cost pressure - which saw gross margin contract by 923bps y/y and 317bps q/q;

(3) y/y and q/q decline in opex and the margins;

(4) higher than expected finance charges; and ultimately

(5) significant (but cosmetic) PAT growth of 755% y/y and 807% q/q.


Over the nine months of 2016, UNILEVER's revenue and PAT grew by 16.8% and 1011.8% respectively.


UNILEVER's reported revenue of N17.59 billion for the three-month period was way ahead both our estimate and consensus' N15.8 billion. The revenue growth was both volume and price driven, but we believe pricing played a greater role. Between August and September, UNILEVER adjusted the prices of products in its Food and Home Care divisions.


We noted from our routine check that the prices of KNORR, LIPTON, BLUE BAND, and OMO (100g) were particularly increased during the period. We were also informed by key distributors that the impact of the PIs on volume was moderated by similar PI actions taken by competitors. The price increases according to our routine check, is in line with the strong revenue growth recorded in the Food (+26% y/y and +12% q/q) and Home Care (+73% y/y and +36% q/q) divisions over the three months period. The Personal Care division remains challenged.


Significant gross margin contractions during the period signal continued rising production costs, particularly for raw material inputs that are broadly exposed to currency fluctuations – note that the NGN depreciated further (in all market segments) during the period. Besides, LPFO substitution in the energy mix remains substantial.


Interestingly, opex reduced in both nominal (21% y/y and 16% q/q) and relative (1500bps y/y and 690bps q/q) terms. Savings in brand and marketing spend accounted for the decline in opex.

Finance charges were an upside surprise, rising 8.4% y/y and 143.5% q/q. The q/q surge truncated the trend quarterly decline observed since Q2-15 and is largely attributable to additional (about N7.4 billion) short term borrowings taken during the period. This is surprising, as we had thought that management was committed to deleveraging, bearing in mind that high finance charges have had serious negative consequence on UNILEVER's earnings in recent years.


There is a discrepancy between Cordros Capital’s computed PBT and that in the management account, following an unclear adjustment (by management) on the finance income line. That said, PBT, by our computation, came in at N23.9 million (vs. management's N175.1 million). Adding a tax credit of about N450 million, PAT came in at N473.6 million (vs. management's N388.2 million).


Cordros Capital’s forecasts are under review.

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