Friday, November 24, 2017 02:20PM /FBNQuest Research
Increase to earnings estimates
Unilever Nigeria successfully raised N58.9bn via a rights issue in September, adding 1.96bn shares to the existing 3.78bn shares. Management disclosed that the funds will be used to repay intercompany loans, support working capital and for capacity expansion. Between 2014 and 2016, the company went through challenges, mainly due to the macroeconomic difficulties in the country and recorded PBT as low as N1.8bn in 2015 (versus an average PBT of N7.1bn between 2009 and 2013).
However, due to the steady pickup in the economy and the favorable CBN policies that have made sourcing of FX easier, our view on the company has started to turn positive, even more so due to the anticipated expansion plans which we have reflected in our model. The company’s loan book reduced by -60% q/q in Q3 2017. We expect this reduction to lead to lower finance charges.
The company’s most recent (Q2 and Q3 2017) results surprised positively. As such, we have raised our earnings estimates over the 2017-18E period significantly and our price target by 10% to N36.1. Despite rolling over our DCF valuation to 2018, the increase to our price target is slimmer mainly due to increased WACC, following the capital raise. Unilever shares are trading on a 2017E P/E of 19.1x for EPS growth of 13% y/y in 2018E.
This year, the shares have returned +25.7% ytd (NSEASI: +36.5%) Our price target implies a downside potential of -10%. We have retained our neutral rating on the stock however because we believe the deleveraging and expansion are supportive for the longer term.
Q2/Q3 2017 PBT and PAT up significantly
Q3 2017 results showed that sales and PAT of N24.0bn and N1.1bn grew by 37% y/y and 143% y/y respectively. PBT of N1.8bn compares with PBT of N24m reported in Q3 2016. Although net interest charges and operating expenses advanced by 8% y/y and 39% y/y respectively, these negatives were not strong enough to offset the y/y sales growth and a 661bp y/y gross margin expansion, leading to the strong bottom-line.
The growth in PAT was slower because of a tax expense of –N630m compared with a tax credit of N450m in Q3 2016. In Q2 2017, sales of N22.9bn grew by 48% y/y. PBT and PAT of N2.9bn and N2.1bn compare with Q2 2016 PBT and PAT of N68m and N52m respectively.
Although net interest charges advanced by 318%
y/y, this was not strong enough to offset the strong y/y sales growth, a 532bp
y/y gross margin expansion and a minuscule y/y decline in operating expenses,
leading to the strong bottom-line.