April 26, 2021 / 09:55 AM / By FBNQuest Research / Header
Image Credit: Market Digest Nigeria
Impressive Q1 '21 results trigger raise in '21f EPS forecast
We have raised our EPS forecasts over the '21-22f period by 34% and our price target by 21% to NGN13.9. The smaller increase in our price target reflects our decision to increase our risk-free rate assumption to 12.5% (from 11% previously) due to rising government bond yields. The increase to our earnings forecasts force a ratings ugrade to Neutral (from Underperform) as they reflect the potential impact of higher sales prices and a return to credit sales by Unilever. We have increased our turnover forecast for '21f from NGN63.7bn to NGN70.3bn (+13.5% y/y). Our new forecast is conservative as the Q1 '21 run-rate indicates FY '21f sales of NGN77.7bn. We expect the company's food segment to underpin overall turnover growth, on the back of price increases (segment sales of NGN39.4bn).
For the Home Personal Care (HPC) segment, we estimate revenue at NGN30.9bn with credit sales, brand renewal and the introduction of smaller product packages providing some buffer. On the proposed separation of the Tea business, management has provided more clarity. The transaction will involve a spin-off deal, which would see Unilever transfer the assets (and licenses) of the Tea division to a new company called the "Nigeria Tea Company" (NTC). The NTC will be 100% wholly owned by Unilever, and consequently consolidate its financial results with Unilever's. The Tea division is estimated to account for 13.8% of Unilever's annual turnover. Away from topline, we project Unilever's gross margin at 22.9% (+219bps y/y and -35bps against prior forecast).
Our estimates reflect a 10.3% y/y increase in costs of sales to NGN54.2bn. Unilever's input costs are largely sourced locally, with some components imported for HPC products. Down the income statement, Unilever's low debt will keep interest expense low, alongside a robust cash balance, which should culminate in net interest income of c.NGN1.5bn. Combined, these should lead to a PAT of NGN935m (vs. -NGN4.0bn in FY '20 and +28.7% against prior forecast of NGN726m). From a multiples perspective, Unilever is trading on a '21f EV/EBITDA of 9.5x, compared with SSA and EM peers of 14.3x and 20.4x respectively. Year-to-date, Unilever's shares have shed -6.8% vs. the ASI's -2.4%.
Unilever returns to credit sales in Q1 '21
In Q1 '21, Unilever reported turnover of NGN19.4bn, up +45.7% y/y and +12.8% q/q, an impressive outturn considering that this is the highest since Q2 '19. However, due to elevated cost inflation and fx-linked raw material costs, gross margin contracted by -267bps y/y to 23.0%. On the balance sheet, net trade receivables increased by around 34% ytd. This signifies a return to credit sales after management introduced restrictions since Q3 '19, which is positive for sales in FY'21f.