Thursday, April 21, 2016 9:15AM/ FBNQuest
Resetting our expectations after strong Q4 2015/Q1 2016
Following Unilever Nigeria’s (Unilever) Q4 2015 and Q1 2016 results, both of which were better than expected, we have increased our 2016-17E earnings forecasts by about 5x on average. Despite this, we have increased our price target by a much slimmer margin of 7% to N22.10.
The significant earnings increase reflects the fact that we had been deliberately conservative on our 2016-17E estimates in particular, following disappointing results leading up to Q3 2015 as well as management not having provided comments on past results or future guidance.
However, the DCF assumptions driving our previous price target were not as conservative, hence the magnitude of the change to our price target being much lower. Ytd, Unilever shares have shed -32% (ASI -14%).
Despite the sell-off, we still find the shares relatively expensive: they are trading on a 2016E P/E multiple of 39.3x (vs an average of c.30x for the consumer goods names we cover) for 7% y/y av. EPS growth over the 2016-18E period. From current levels, we see a potential downside of -25%. We have retained our Underperform rating.
Further (positive) surprises cannot be ruled out
Two quarters in a row of strong results suggest that Unilever’s Q4 2015 results were not a flash in the pan.
However, even with our earnings upgrade, we may still be underestimating the extent of the turnaround that Unilever is experiencing. Plans to source more raw materials locally as well as changes to the company’s leverage may lead to further positive surprises.
Notwithstanding, without comments/guidance from management, it is difficult to carry forward the full extent of the positive surprise.
Positively surprising set of Q4 2015 and Q1 2016 numbers
Unilever’s Q1 2016 results showed that while sales of N16.8bn were up 13% y/y, PBT and PAT increased by wider margins of 64% y/y and 76% y/y to N1.4bn and N1.0bn respectively.
Q4 2015 results on the other hand showed that sales and PAT increased by 36% y/y and 78% y/y respectively. In addition to the strong sales growth during both quarters, the Q1 2016 PBT increase was also driven by a 200bp y/y gross margin expansion to 36% and a -36% y/y decline in net finance charges while Q4 2015 PBT was helped by a gross margin expansion of 928 bps y/y to 37.4%.
On a sequential basis, Q1 2016 sales and PAT were flattish q/q, while PBT declined by -10% q/q.