UNILEVER Rated Underperform; Records PBT & PAT Decline in H1'15

Proshare

Thursday, July 23, 2015 1:19pm / FBN Capital Research   

Event:
Unilever Nigeria reports Q2 2015 results

Implications: Cuts to consensus estimates very likely

Positives: Some resilience in gross margin relative to our expectations

Negatives: PBT and PAT losses of –N771m and –N505m respectively.


This morning, Unilever Nigeria (Unilever) reported Q2 2015 results which showed that sales of N13.8bn were down -10.6% y/y. Unilever recorded PBT and PAT losses of –N771m and –N505m respectively.


These compare with profits of N988m and N714m posted in Q2 2014. The weak performance was driven by a combination of factors: Unilever’s finance charges, which grew by 160.5% to N716m, a contraction of -329bps y/y in gross margins to 33.9% and a rise of 6.1% y/y in opex.

 

The insecurity challenges in the North east and increased competition in the southern markets make it difficult for consumer goods names to pass on higher costs to consumers owing to fears of losing market share.


Our channel checks indicate that Unilever has lost ground in several key consumer segments. We believe the devaluation of the naira is the major driver behind the gross margin contraction recorded during the period.  

However, we do not think it explains the significant rise in finance charges as Unilever’s loan book is predominantly naira denominated. Unilever’s loans have risen by 44% since Q2 2014. Opex growth came in quite strong as the company continues to increase its brand awareness for the aforementioned reasons.

On a sequential basis, sales were down by -7.4% q/q, while the loss before tax and loss after tax compare with PBT and PAT of N866m and N590m respectively in the previous quarter.

 
Compared with our estimates, while sales missed by 14%, PBT and PAT were significantly behind our forecasts of N784m and N549m respectively. Finance costs came in 44.5% higher than we were forecasting.

 

On an annualised basis, sales are behind consensus’ estimates by 4%, while PBT is tracking significantly behind consensus’ FY PBT forecast of N3.7bn. We expect marked downward revisions to consensus’ forecasts.

 

 
Year to date, Unilever shares have gained 6.4%, outperforming the NSE ASI which has shed -9.6%. However, since Unilever Overseas Holdings increased its stake in Unilever Nigeria, at a tender price of N45.50, the stock has shed -18.6% (vs NSE: -5.6%).


Despite the recent sell off, we still find the shares expensive. On our published estimates, they are trading on a 2015E P/E multiple of 68.7x (compared with an average of about 30x for our universe of consumer goods stocks) for a 2016E EPS growth of 12.2% y/y.

 
We do not expect a turnaround in Unilever’s fortunes in the near to medium term given the weak macro environment.

We continue to believe that consumer goods names with a material exposure to non-food such as Unilever are particularly disadvantaged.

 

 
We rate the stock Underperform. Our estimates are under review.

Unilever Nigeria Q2 2015 results: actual vs. FBN Capital Research estimates (N millions)


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