Unilever Nigeria Plc Rights Issue: Dilution to Take Centre Stage


Thursday, June 29, 2017 4:22 PM / ARM Research

Yesterday, Unilever gained shareholders’ approval to raise N63 billion through the issuance of ordinary shares on such conditions and time the directors may deem fit. The rights approval was obtained after company’s shareholders assented to the creation of additional shares of 3.95 billion (current: 3.8 billion shares) new ordinary shares of 50 kobo each ranking in all respects parri passu with the existing shares of the company.

Importantly, the terms of the issue authorize the directors of the company with the right to apply outstanding convertible loans or other loan facility towards payment for any shares subscribed for under the rights issue.

This is in line with our prior prognosis for the parent company to convert its outstanding debt (FY 16: N18.5 billion) to equity. In our view, the rights issue provides Unilever UK with a more efficient window to increase its holdings in its Nigerian subsidiary after its less than successful bid in 2015.

Unilever UK’s increased share buyback activity (FY 16: +1.53 pps YoY to 60.06%), we expect the rights issue to be fully subscribed. Thus, using current pricing, we project a 44% increase in Unilever’s shares outstanding to 5.5 billion.

Debt reduction positive for earnings

In the event that Unilever’s rights issue is completed in FY17 and executed at current pricing of N36.01, we project an improvement in the company’s debt -to equity ratio to 0.1x (FY 16: 1.8x) and interest coverage ratio to 39x (FY 16: 2x).

Overall, given the expected decline in Unilever’s gearing ratio and consequently interest expense (-87% to N297 million), we expect the rights issue to consolidate the company’s cost containment and price increase measures as it hopes to sustain earnings growth in an environment riddled with challenges.

In addition, the conversion of foreign loans (entirely from the parent company) should also delink earnings from FX volatility. Thus, we estimate Unilever’s FY 17 earnings at N10.2 billion (prior: N8.8 billion) which is 3x higher YoY. Nevertheless, given the potential increment in shares outstanding, FY 17 EPS is forecasted to decline to N1.85 (from N0.81 in 2016).

Price hikes and operating efficiency bolster Q1 earnings

Extending the double-digit growth in the prior five quarters, Unilever recorded a 32.1% YoY rise in top-line to N22.2 billion reflecting solid sales across its three product segments: Home Care (+50% YoY), Personal Care (+37% YoY) and Food (+22% YoY).

The strong top-line growth continues to reflect impact of price hikes across its product portfolio (QoQ: Royco: +19%, Knorr: +24%, Close-Up: +26%, Lux: +29%) as the company gradually pass-on impact of inflationary pressures to consumers.

Despite the improved earnings, a noteworthy drag on the company’s performance is the steep rise in COGS (+47.7% YoY to N6.3 billion) which drove gross margin to 28.4% (-7.6pps YoY). Given Unilever’s high import-COGS ratio (FY 16: 62%), input cost pressures in the quarter likely reflected impact of weaker naira (-53.8%YoY), bullish prices of petrochemical inputs (+55% YoY) as well as higher CPO prices (+106% YoY).

Furthermore, the company intensified its operating efficiency as cutback in Branding and Marketing (-45% YoY), Services (-31% YoY) and Overhead expenses (-11% YoY) kept OPEX (-14.1% YoY to N3.5 billion) in the negative territory for the fourth quarter running. Consequently, operating profit printed at its highest level in 22 months at N2.8 billion (+44.4% YoY). 

In addition, the company reported a mild increase in net finance cost (+18% YoY) as a nearly threefold YoY jump in interest income helped temper impact of a 33% YoY jump in borrowing cost. Sifting through the company’s financials, we link the upsurge in interest income to higher cash balance (+333% YoY to N21.4 billion) which reflected improved working capital while finance charges tracked movement in borrowings1 (+151% YoY to N25.4 billion).

Overall, reflecting the positive impact of price induced revenue growth and cost cutting measures, Unilever extended its strong earnings rebound for the sixth consecutive quarter with Q1 17 bottom-line rising 53.9% YoY to N1.6 billion (PAT margin: +1pps YoY to 7.2%). 

Despite the improvement in Unilever’s earnings outlook, the company remains expensive relative to peers trading at current P/E of 38.82x vs 29.69x for Bloomberg MENA peers. We have a SELL rating on the stock with an FVE of N30.94. 

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