Unilever Nigeria Plc - What an Impressive Start; But Watch It!


Wednesday, April 19, 2017/2:26 PM/Cordros Capital

Unilever Nigeria Plc's (UNILEVER) Q1-17 result, released yesterday, outperformed on two fronts: (1) revenue grew by 32% y/y while (2) operating expenses fell by 14.1% y/y. Both came in well-ahead of our +9% y/y and +2% y/y estimates respectively. On the negative, gross margin contracted by 756 bps y/y to 28.4% (and below our benchmark of 31%) while finance costs, higher by 33% y/y, came in 55% above our estimate. Overall, PBT and PAT grew by 53.6% y/y and 53.9% y/y respectively.


While noting the limited visibility on sales volume performance (albeit the result suggests UNILEVER may have increased market share during the period), we believe that revenue continued to benefit strongly from the increase in the prices of key products. We had noted earlier this month that UNILEVER increased the prices of CloseUp, Knorr, Lipton, Omo and Sunlight in February and March. And bearing in mind the continued resilience of the Food (+22% y/y) and Home Care (+50% y/y) divisions, we note that the surge in Personal Care revenue (37% y/y) contributed immensely to the overall strong top-line performance.


Another positive surprise from the first quarter result is the decline in operating expenses, with brand/marketing and overheads expenses specifically falling by 45% y/y and 11% y/y respectively.


Despite the price increases, the gross margin of 28.4% realized during the period was 756 bps shy of Q1-16 margin, and barely improved from the 28.1% achieved in the final quarter of 2016. This is suggestive of sticky, and perhaps, rising per unit production cost, consequently pressuring gross profit which grew by a marginal 4.3% y/y.


Still on the negatives, finance costs increased by 32.8% y/y, mirroring the increase in gross debt to N25.4 billion, from N20.9 at the end of 2016. During the period, the company drew on an overdraft facility of N3.5 billion and increased other short term borrowings by about N1 billion. In a press release last week, the company officially announced the plan to raise capital via Rights Issue, the proceeds of which would be channeled to (1) deleveraging the balance sheet and (2) working capital and capital expenditure investments.




This morning, UNILEVER notified the Nigerian Stock Exchange (NSE) of the recent announcement by its parent company -- Unilever Group -- of the intention to divest its spreads business as part of the outcome of the strategic review embarked on. In line with this announcement, we expect UNILEVER to launch the process to sell its spreads business (Blue Band), which by our estimate -- (1) accounts for about 24% of gross revenue and (2) has the biggest share of the spreads market -- and according to management, continues to perform impressively (with expansion plan recently decided at the group level).

While the latest result appears impressive from the point of view of revenue and opex, our focus is on the continued pressure on gross profit. This, if not addressed, portends imminent earnings weakness in the event that revenue growth runs out of steam and opex starts to rise (as we expect). But in the mean time, we expect investors to react positively to the announced PAT, which, if we annualized, is ahead of consensus by 112.3%.

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