Thursday, April 20, 2017/ 2:10 PM /Vetiva Research
· FY’16 topline up 11% q/q as Home and Personal Care segment surprise
· Cost savings from OPEX drive Q1’17 PAT outperformance
· ₦63 billion rights issue on the cards following tough 2016
· Upward revision to estimates, target price – SELL rating maintained
Q1’17 PAT beats estimates on significant upside from cost savings
Following a tough operating year, UNILEVER began 2017 on a positive note with Q1’17 revenue up 32% y/y to ₦22.2 billion – the largest quarterly revenue figure on record.
Given the price increases implemented in H2’16, the impressive y/y performance was largely supported by the lower pricing base of Q1’16.
We are more impressed by the strong q/q performance recorded, with revenue up 11% q/q, 5% above Vetiva estimate.
Surprisingly, the Food Segment (which typically records the strongest growth) was the underperformer in this quarter, recording a mild 2% q/q growth.
Thus, the notable Q1’17 revenue was driven by strong performances in the Home and Personal Care (HPC) segments as revenue rose 19% q/q and 23% q/q respectively.
With gross margin stable at 28% q/q, gross profit for Q1’17 printed in line with Vetiva estimate at ₦6.3 billion. The major deviation to our estimates however came from the sustained lower operating expenses.
We recall that in a bid to relieve margins amidst severe production cost pressures in 2016, UNILEVER (like other FMCGs) undertook large cuts to operating expenses (OPEX), particularly in its marketing spend and overhead costs.
Whilst we had expected OPEX to return to normal levels in 2017, the company has maintained tight control on expenses with Q1’17 OPEX to sales at a historic low of 16% (Q1’16: 25%, Vetiva: 21%).
Following this, PAT came in 54% higher y/y at ₦1.6 billion – outpacing Vetiva’s ₦0.9 billion estimate.
UNILEVER picks baton, seeks shareholder approval for Rights issue
Unilever Nigeria in a notice to shareholders, announced its plans to increase its Authorized Share Capital to ₦5 billion (currently at ₦3 billion) and also raise up to ₦63 billion by way of Rights Issue.
In addition to this, the company stated that any outstanding convertible loans or shareholder loans can be applied towards payment under the Rights Issue.
We recall Guinness Nigeria is in the process of undertaking similar corporate actions following a challenging 2016 that saw FMCGs’ leverage ratios rise to historic levels.
UNILEVER obtained a short term intercompany loan of $60 million (₦18.8 billion) in Q3’16 to cope with dollar liquidity shortages in Nigeria.
Following this, the company’s debt-to-equity ratio rose to 1.79x (5-year average: 1.34x and industry average of 0.82x).
Although earnings were not affected by FX losses – given that the loan was obtained after the major currency devaluation in Q2’16 – Unilever is taking a step to both deleverage its balance sheet and de-risk its earnings in the event of another devaluation.
Whilst we await further details on the transaction, assuming an issue price of ₦33.15 (current market price), we expect total shares outstanding to rise by 50% to 5.68 billion.
Following the release of the notice, the stock has lost c.500bps in what appears to be a negative reaction to potential dilutive impact of the issue on earnings in the near term.
We are yet to consider the Rights Issue in our valuation as we await clarity.
Unilever Group to divest spreads business
Unilever Nigeria yesterday released a notice on the Nigeria Stock Exchange updating shareholders on Unilever Group’s intention to divest its Spreads business.
The notice stated that this move would have no immediate effect on Unilever Nigeria PLC’s activities. We recall Unilever Group had announced plans to spin off its Spreads business earlier this year shortly after a failed takeover bid from Kraft Heinz.
We note that the Group’s spreads segment has been struggling for a couple of years due to declining demand for butter and margarine from developed economies.
Whilst brands in the segment continued to grow in emerging markets (including Blue Band in Nigeria), this growth was unable to offset the continued slowdown in developed markets.
We cautiously await the development of this story even as the group decides on whether to sell or spin off the business.
Revision of estimates, target price – SELL rating unchanged
Following the revenue outperformance recorded in Q1’17, we revise our FY’17 revenue growth forecast to 13% (Previous: 8%).
Given that Q1’17 is one of the faster selling quarters, we expect q/q revenue decline in Q2’17.
We remain slightly optimistic on production costs in the coming quarter, noting the downtrend in global oil palm prices (key imported raw material) since the start of the year (down 20% ytd) and relatively stable exchange rate environment.
Our major revision however is to the OPEX line. In line with the strategy of its parent company, it is clear UNILEVER intends to leverage on cost savings strategy to support earnings performances.
Thus, we revise our OPEX (as a % of sales) estimate lower to 18% (Previous: 21%). With this, FY’17 EPS estimate is revised higher to ₦1.36 (Previous: ₦0.88).
Our 12-month target price is revised higher to ₦22.52 (Previous: ₦20.12).