Unilever Nigeria Plc. - Solid Earnings Growth; Set to Beat PAT Record

Tuesday, Oct 24, 2017 8:53AM/Vetiva Research

·         Impressive revenue growth persists, 9M’17 Topline up 39% y/y

·         Stronger growth recorded in HPC segment – up 22% q/q

·         9M’17 PAT shows strong improvement, albeit slightly below estimate

·         Slight revision to FY’17 PAT estimate, Target price 

Revenue growth remains strong as HPC takes the lead
UNILEVER maintained a strong positive sales momentum in its third quarter, with 9M’17 revenue up 39% y/y to N69 billion – 5% above Vetiva estimate. Though top line performance remains largely supported by strong double-digit price increases from prior quarters, we believe the 5% q/q revenue increase in Q3’17 reflects higher volume contribution in the period (amidst stable prices). 

Across product lines, the Home and Personal Care (HPC) segment continues to drive revenue (up 22% q/q) amidst a 9% decline in the Food products segment. On a y/y basis however robust top line growth has been recorded from both segments; HPC (up 50% y/y), Food Products (24% y/y). With an even stronger boost expected from the traditionally stronger Q4 season, we estimate a 37% y/y topline growth from UNILEVER for FY’17 with revenue rising to N95.7 billion (Previous: N88.8 billion). 

Y/Y rise in 9M’17 PAT, albeit marginally misses amidst softer Q3
UNILEVER reported net earnings of N4.8 billion in 9M’17, much higher than the N1.6 billion recorded in the same period last year, but 7% below our N5.2 billion estimate. This underperformance was largely driven by a 388bps q/q contraction in operating margin to 12% (Vetiva: 13%) and 29% q/q rise in net finance costs to N1.0 billion (Vetiva: N619 million). 

Operating margin was impacted by a sharp rise in Marketing costs, as well as a 188bps q/q moderation in gross margin. Overall, Q3’17 PAT declined 40% q/q to N1.2 billion – 18% below Vetiva estimate – however much higher than the N388 million from the same period last year. 

Optimistic on seasonally stronger Q4; FY’17E PAT to surpass records
Following the moderation recorded in Q3’17, we cautiously revise our FY’17 operating margin estimate to 13% (Previous: 14%, Q3’17: 12%). Despite the spike in financing costs in the quarter, we foresee a moderation in net interest expense in Q4’17 given the 63% q/q decline in borrowings to N7.6 billion at the end of 9M’17. Similarly, we highlight UNILEVER closed its c.N59 billion equity capital raise, which was earmarked for the repayment of outstanding debt obligations. 

Hence, we expect finance cost to come in softer in the coming quarters. Overall, following the upward revision to our revenue estimate, our FY’17E PAT is revised slightly higher to N6.92 billion (Previous: N6.89 billion) amidst lower margin expectation. This translates to a 125% y/y rise in bottom line to potentially the highest PAT on record by the HPC leader. Our FY’17 DPS estimate is unchanged at N0.30 (2016: N0.10). 

Consequently, we revise our Target Price to N26.10, SELL (Previous: N25.01). Major downside risk to this valuation would be a much lower boost from the seasonally stronger festive season in Q4, whilst upside would be a tighter control of operating expenses.





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