Monday, April 23, 2018 /11:35AM /Cordros Capital
Last week, UNILEVER published Q1-18 result showing net profit grew by 81% y/y, 2% ahead of our estimate (and 21% ahead of consensus). Revenue came in better-than- expected, operating expense was well-contained, and finance cost (though higher than we expected) was significantly lower, courtesy of the borrowings repaid last year. On the negative, however, gross margin was well-below expectation, after the positive surprises of the last three quarters of 2017FY.
Surprising bullish revenue
The revenue growth of 16% y/y (+19% q/q) was ahead of the 10% we estimated, but in line with consensus. The growth was even across the business segments, with Food growing by 16% y/y and HPC by 17% y/y. There were price increases up until Q2-17, the impact of which we believe is somewhat reflected in the latest revenue.
We should also reiterate the impact of volume on revenue, reflecting the
(1) campaigns and promotional activities that took place during the quarter
(for Knoor Chicken seasoning and Close-Up toothpaste), (2) increased activities
of distributors following the slack in (34-17, and (3) introduction of new
products, notably (from our routine checks), Sunlight bar soap and 709 and 259
Sunlight detergents. We raise 2018E revenue growth estimate to 13% (previously
7.5%), based on the (1) stronger-than-expected Q1 growth and (2) impact of the
5% increase in the price of Lipton tea implemented this month. Risks to our
estimate are (1) the increasingly competitive environment, particularly in the
HPC segment, possibly resulting in (2) softer products prices in the course of
Sharp q/q fall in gross margin; no worries for now
Given the stability of both selling prices and the naira exchange rate during the period, we should mention that production costs, and consequently gross margin (72 bps y/y and 704 bps q/q to c.28%), may have been pressured by the rising price of petroleum products (which form key inputs in UNILEVER’s production process). Notwithstanding the low outturn, we retain our gross margin estimate of 32% for 2018E, consistent with those achieved in the last three quarters of 2017FY. Recall that gross margin in 01-17 (28%) was the lowest in all quarters of last year, before the improvement seen in the subsequent quarters.
EBIT grew 28% y/y (-c.7% q/q) while the margin increased by 124 bps y/y. This bigger growth in EBIT, over gross profit (13.5% y/y), was helped by opex, which only grew by 2% y/y (-3% q/q) while the proportion to revenue was 199 bps lower on y/y basis. UNILEVER’s opex has grown by only a marginal 3% average in the last four years (slightly ahead of PZ’s 5%) and this has been constructive to earnings. Management had mentioned during H1-17 call that it is controlling opex by (1) eliminating wastes, (2) validation of all expenses (288), and (3) discriminating between expenses. We have forecast opex to grow by c.8% in 2018E (vs. 9% in 2017FY), suggesting we expect higher spending especially during the off-peak periods in Q2 and Q3.
Healthier balance sheet
Total borrowings reduced to NGN457 million, from NGN674 million as at end-December 2017, with gross debt-to-equity now at 0.6%, vs. 191% a year ago. The finance cost of NGN98.6 million reported was surprisingly higher – despite reduced borrowings - than the NGN69 million we estimated for the full year. We have consequently raised finance cost estimate for 2018E to NGN150 million. Cash remained strong at NGN47.5 billion, delivering interest income of NGN494 million (89% via bank deposits) that far exceeded the NGN130 million we estimated for the quarter. We retain our finance income estimate for 2018E, as the reported amount (which we do not expect will be delivered in the remaining quarters) is consistent with the NGN1.2 billion we modeled for the full year.
We maintain our SELL recommendation but increase target price to NGN32.78 (previously NGN30.47) even as we slightly revise our estimates. On our numbers, UNILEVER currently trades on FY18E P/E and EV/EBITDA multiples of 27.9x and 12.6x respectively.
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