Unilever Nigeria Plc: FX Woes Adding to Structural Challenges


Wednesday, July 20, 2016 9:00AM /FBNQuest Research

Resumption of weak earnings in Q2 2016
Following Unilever Nigeria’s (Unilever) weaker-than-expected Q2 2016 numbers, we have cut our earnings estimates over the 2016-17E period by -48% on average. In addition, we have increased our risk-free rate assumption by 200bps to 14.5%.

However, we have trimmed our price target by a slimmer margin of -8% to N20.4 due to our decision to roll over our DCF valuation to 2017 and because we have left our long term assumptions regarding the company practically unchanged.  Ytd, Unilever shares have shed -23.7%, underperforming the NSEASI by 23.2%.

Despite the sell-off of recent, we still find the shares relatively expensive: they are trading on a 2016E P/E multiple of 85.6x (vs an average of c.30x for the consumer goods names we cover) for 8% y/y av.

EPS growth over the 2017-18E period. From current levels, our new price target shows a potential downside of -38.2%. We have retained our Underperform rating.

Gross margin contraction weighed on earnings
Q2 2016 showed that sales of N16.8bn were up 12% y/y. PBT and PAT of N68m and N52m compare 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.

Further (negative) surprises cannot be ruled out
Unilever’s recovery of recent, following a stronger-than-expected set of Q4 2015 and Q1 2016 numbers, was short-lived mainly because of a gross margin contraction. Without any guidance from management, we believe the contraction was due to the higher cost of raw materials arising from the CBN’s decision to float the naira and the depreciation of the naira by around 30%.

Whilst we forecast that the company would still be able to grow its topline in the near term, our outlook on its earnings remains conservative until strategies to mitigate the effect of fx challenges are reflected in its financial performance. We estimate 2016E sales and EPS growth of 11% y/y and 22% y/y respectively (EPS growth flattered by base effects).

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