Tuesday, July 19, 2016 10:04AM /Vetiva Research
· Sales momentum sustained in H1’16
· Quarterly performance reveals earnings reality
· Gross margin moderates 806bps q/q to 28%
· FY’16 EPS cut to reflect higher cost of sales
Sales momentum sustained in H1’16
UNILEVER sustained the sales momentum for the third consecutive quarter with the H1’16 financial results showing a 12% y/y revenue growth, in line with our estimate. This was driven by strong performances in both the Food and Home segments, up 22% y/y and 25% y/y respectively.
We believe UNILEVER would have benefitted from intense promotional campaigns and investments in route to market in the past year. The Personal Care segment however continued to underperform, posting a 12% y/y sales decline.
Whilst cost of sales rose 16% y/y (6% above our estimate), a 54% y/y moderation in net finance charges and relatively unchanged operating expenses served as support for the bottom line. Overall, PAT rose to N1.09 billion (H1’15: N86 million), however 35% below our N1.69 billion estimate.
Quarterly performance reveals pressured Gross margin
Whilst Q2’16 revenue came in line with our estimate, the topline declined 8% q/q amidst heightened pressure on consumer wallets in the period. Amidst sustained currency weakness in the quarter, UNILEVER’s Gross margin moderated 806bps q/q to 28% given its exposure to imported raw materials such as palm oil and tallow.
This suggests that the company might have been unable to pass on the higher costs to consumers given the tough macroeconomic landscape. Despite a 62% q/q moderation in net interest charges, net earnings declined 95% q/q to N52 million (Q1’16: N1.04 billion), 92% below Vetiva’s estimate.
FY’16 EPS cut to reflect higher cost of sales
Whilst H2 historically throws up better numbers relative to H1, we remain cautious about UNILEVER’s ability to sustain this run rate amidst tight consumer wallets and persistent macroeconomic headwinds. Given this, we have maintained our turnover forecast for FY’16 at N62 billion, which implies a 4% y/y growth.
We believe we will continue to see translated effects of higher input prices following the naira devaluation with sustained pressure on the company’s gross margin. That said, our net earnings forecast has been revised downwards to N1.85 billion (Previous: N2.59 billion) amidst rising costs. Consequently, our 12-month target price is also revised slightly downwards to N15.76 (Previous: N16.25).