Monday, June 08,
2020 / 12:59 PM / by FBNQuest Research / Header Image
Credit: Brandpower Magazine
Modest increases to forecast earnings
Unilever Nigeria's (Unilever) PBT of N948m beat our pre-tax loss forecast of -N902, driven by a -34% positive surprise in opex. Beyond that, management during its Q1 call was upbeat about the company gradually recovering from the distribution crisis seen in H2 last year which led to historic losses. Although sales were down -31% y/y to N13.3bn, this represents a 51% surge q/q. The surge was supported by price increases implemented early this year across some of the premium brands.
Management also mentioned that the COVID-related lockdown was beneficial to the Home & Personal Care segment as well as the seasonings business because of a general increase in hygiene awareness as well as increased consumption that comes with staying indoors. That said, we still foresee the impact of the dislocation in the fx market and competitive headwinds as key obstacles to earnings. We also argue that the restriction of movements and social gatherings in major cities would have put more downward pressure on sales.
Nevertheless, post-Q2, we forecast that sales will pick up by 27% and 44% y/y in Q3 and Q4 respectively due to favourable base effects, but this will be largely undermined by the fx inflationary pressure. We have adjusted our 2020E PBT to N1.3bn from a pretax loss of -N1.4bn. Our 2021-22E EPS forecasts are also higher by an average of 12%, but remain well below historical levels given that sustained price competition across Unilever's core businesses are likely to weigh heavily on earnings. Given the upward adjustments, our new target price of N12.5 is around 5% higher.
Year-to-date, Unilever shares have sold off by -23%, underperforming the broad index by -16%. From current levels, our price target implies a downside potential of -27%. We maintain our Underperform rating on the stock.
Q1 earnings climb out of negative territory
Q1 2019 sales declined significantly by -31% y/y to N13.3bn whereas gross margin expanded by 560bps to 25.7%. Opex however increased by 24% to N2.9bn while net interest income was down -30% to N495m. Consequently, Unilever's PBT halved y/y to N948m. On a sequential basis, sales were increased by 51% q/q while gross margin improved significantly q/q. Opex was down 53% q/q whereas net interest expense declined by -18%. Q1 PBT therefore compares with a pretax loss of -N10.4bn in Q4 2019. Relative to our forecasts, gross margin and opex beat by 871bps and -34% respectively, driving the PBT positive surprise.