Unilever Nigeria Gross Margin Contrasts by 607bps in Q2 2016 Results


Monday, July 18 2016 11:47PM /FBNQuest Research

Event: Unilever Nigeria reports Q2 2016 results
Implications: Downward revisions to consensus estimates likely
Positives: Sales up 12% y/y
Negatives: Gross margin contracted -607bps y/y and -806bps q/q
This morning, Unilever Nigeria (Unilever) reported Q2 2016 results which showed that sales of N16.8bn were up 12% y/y. PBT and PAT of N68m and N52m compared with pre-tax and post-tax losses of –N771m and -N505m respectively reported in Q2 2015. Although operating expenses and net finance charges declined -15% y/y and -74% y/y respectively during the quarter, these positives were significantly offset by a -607bp y/y gross margin contraction to 27.9%. On a sequential basis, sales were down -8% q/q, while PBT and PAT were both down -95% q/q. Operating expenses were flattish q/q and net finance charges were down -62% q/q. Again, these positives were offset by a -806bp q/q gross margin contraction, leading to the PBT and PAT declines.

We believe the company was able to grow its topline because of reduced competition (imported products). Importers of food and household products have found it challenging to source fx. Those able to source fx have struggled to increase prices due to the fragmented and low-switching-cost nature of the industry. We believe the gross margin contraction was also due to fx challenges following the adoption of the CBN’s new flexible exchange rate regime and the naira’s downward move to c.N280 per US$ from around N199 previously. We believe the company imports about 15% of its raw materials. Although the devaluation of the naira has eased supply of fx slightly, challenges still remain for both Unilever and competitors. As such, we expect fx issues to continue to weigh on the company, both in terms of reduced demand from consumers and margins.

Compared with our estimates, while Q2 sales were broadly in line, PBT and PAT missed by significant margins, mainly due to the negative surprise on the gross margin line (Q2 gross margin was down -806bps q/q as aforementioned and missed our estimate by -732bps).

On a half year basis, H1 sales of N32.3bn were up 12% y/y while PBT and PAT of N1.5bn and N1.1bn were both up 1,481% y/y and 1,178% y/y respectively, flattered by very weak comparables. While sales are broadly on track to meet consensus FY estimates of N65bn, PBT and PAT are tracking behind by around -21% on average. Unilever management has not guided the market on their outlook for some time, hence the wide disparity between our forecasts (and consensus) and the actual reported figures. Following the weaker-than-expected results, we expect  to see downward revisions to consensus estimates.

Year to date, Unilever shares have shed -23.7%, significantly underperforming the NSE ASI which has gained +0.6%. On our published estimates, Unilever shares are trading on a 2016E P/E of 44.3x (compared with the 29x the broad universe of consumers are trading on). Despite the sell-off this year, we still believe the shares are overpriced and expect the market to react negatively to the company’s Q2 numbers.

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

Unilever Nigeria Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)

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