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Between Unilever And PZ Cussons: More Positive on Unilever - ARM


Wednesday, January 30,  2019  04:18 PM / ARM Research                                   


  • In this report, we update our views on PZ and Unilever, making adjustment to our cost of sales to reflect expectation of lower petrochemical prices over 2019. Also, we changed our risk-free rate assumption to 15% (previously 14%) – reflecting the average 6month yield on the generic 10-year bond yield. Having factored these changes in our model, we have a BUY rating on Unilever with a FVE of N49.19. On PZ however, we retain our SELL rating with FVE of N10.93.  
  • Competition to hamper topline growth: Over 2019, competition from imported goods is still expected to constrain revenue growth for sector players, as the relative stability in the foreign exchange market and FX accessibility continues to provide incentive for importers. We therefore expect revenue for PZ to decline by 4.8% over FY 19 to N76.7 billion. To buttress, PZ’s products are not particularly key leaders in their segment. Beyond 2019, we expect gradual improvement in revenue. On Unilever however, we expect support from the food business to drive a revenue growth of 11.4% YoY to N111.0 billion over 2019, given its resilience over the last two years, having maintained a doubledigit growth. 
  • On cost, our expectation of lower global crude oil prices over 2019 guides to lower petrochemical prices coupled with the CPO market remaining in a glut for most part of the year, we expect lower input cost over 2019. That said, we expect gross margin for Unilever to expand by 134bps to 32.8%. For PZ however, given the higher  petrochemical prices reported in the first half of its financial year1 which compressed gross margin over the period. With the relative lower petrochemical prices over the second half, we see slight improvement in margin, which will moderate the rate of compression over full year 2019. We therefore expect gross margin to print at 26.7% - down by 366bps. 
  • Overall in the sector, we prefer Unilever as the foregoing coupled with its significant cash balance worth N46.8 billion forms our earnings estimate of N13.3 billion – up by 9.5% YoY and brings the EPS to N2.31. On PZ, while the operating performance would still remain weak – support from lower FX loss would drive earnings higher by 9.6% YoY to N2.0 billion with EPS of N0.51. That said, we have a fair value estimate of N49.19 on Unilever, implying a 34.6% upside from current market price, which translates to a BUY rating on the stock. On our numbers, Unilever trades at a P/E of 17.6x, which is a discount when compared to its Bloomberg MENA peer average of 19.6x. On PZ however, we have a SELL rating with FVE of N10.93.  On our numbers, PZ trades at a P/E of 42.9x, which is a discount when compared to its Bloomberg MENA peer average of 32.2x.

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Unilever Nigeria Plc (N49.19, BUY)  

  •  In the personal care segment, we have preference for Unilever Nigeria Plc as we perceive moderation in operating costs over 2019 following our expectation of lower petrochemical and CPO prices. Also, at current market price, the stock appears undervalued when compared to its peers. For context, the company trades at a P/E of 17.6x which is at a discount to MENA peer average of 19.6x and historical average of 20.5x. Also, with management guiding to a possible acquisition/introduction a product line in the food segment using its excess cash position of ~N46.8 billion – following the sale of its spread business – we believe this will be positive for the company in the medium term and thus factored in the capex over 2020. We therefore retain our BUY rating on the stock with our FVE at N49.19, which implies a 34.6% upside form current market pricing. 
  • Sale of spread business, amidst huge cash balance buoys earnings: Over nine months 2018, earnings improved by 1.1x to N9.4 billion stemming from reported net finance income and gains from the disposal of its spread business, which together added a total of N4.4billion to the company’s earnings. We recall the company tapped the equity market in Q3 17 and raised N57 billion via rights issue with proceeds earmarked to repay outstanding foreign currency denominated loans, purchase of needed raw materials and to meet other working capital requirements. Accordingly, the company’s borrowings reduced to N4.3 million which is lower than N8.0 billion reported over 9M 17. With current cash balance at N47 billion, the company was able to report an increase in its finance income worth N2.5 billion (9M 17: N593 million). Over FY 18, we expect earnings to print at N12.1 billion with EPS of N2.11 (+18.2% YoY) with support from lower leverage, higher finance income and gains from sale of its spread business. 
  • We expect improved core operating performance in 2019: Over 2019, revenue is expected to print at N111.0 billion (+11.4% YoY) with support mainly stemming from its food business. For context, notwithstanding the depressed consumer wallet and macroeconomic landscape in 2018, the food business remained resilient, reporting double digit growth over the first nine months in 2018. The personal care segment however struggled, owing to increased competition from imported substitutes. Elsewhere, our expectation of a moderation in petrochemical prices in line with global crude oil prices guides to less pressure on cost over the period. That said, we expect input cost to increase by 9.3% YoY to N74.5 billion which translates to a gross profit of N36.4 billion with related margin at 32.8% (+134bps YoY). Further down, given our expectation of increased OPEX to N21.7 billion (+9.3% YoY) following increased marketing and distributions, we expect a milder increase in operating profit by 8.3% to N15.0 billion. 
  • On financing, its strong cash balance and our expectation of slight uptick in yields translates to a net finance income of N4.4 billion (+33.1% YoY). The foregoing coupled with gains from the topline translates to PBT of N19.2 billion and PAT of N13.3 billion, with EPS at N2.31. On our numbers, we have a dividend expectation of N0.72 which implies a 2019 dividend yield of 2% from current pricing. Currently, the company trades at a P/E of 17.6x, at a discount to MENA peer average of 19.6x. We therefore retain our BUY rating on the stock with our FVE of N49.19, which implies a 34.6% upside form current market pricing.


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PZ Cussons Nigeria Plc (N10.93, SELL) 

  • A Woeful operating performance: Prominent in its H1 19 results is the pressure stemming from its input cost. Over H1 19, sales declined by 14.8% YoY to N35.1 billion as competition from imported substitutes continue to put strain on the company’s volumes. Notwithstanding the double-digit decline in volumes amidst moderation in CPO prices, input cost only declined by 8.9% YoY to N26.2 billion as increased petrochemical prices2 more than offset the declines occasioned by moderation CPO prices and slower sales volume. Furthermore, the management noted that the increased cost of transportation incurred in clearing its raw materials from the port further amplified the pressure on cost. Consequently, gross margin contracted by 480bps to 25.2%, which is the lowest observed in the last five years. While operating expense declined over the period by 16% YoY to N7.1 billion, the dismal performance from topline accentuated decline in operating income by 55.6% YoY to N1.7 billion. 
  • Saved by Lower FX Loss: On the positive, FX loss which has been a significant pressure point for earnings in the last two years declined by 80% YoY to N525 million over the review period. The moderation largely mirrors relative stability in the foreign exchange market with NIFEX rate depreciating by just 10% over H1 19. The foregoing coupled with lower effective taxes supported 107% YoY growth in earnings to N1.2 billion. 
  • For the rest of FY 19, while we expect an improved performance over the second half of its 2019 financial year, which is the peak season, we believe operating profit will come in weaker than the prior year, as competition with imported substitutes guides to weaker revenue of N76.7 billion (-4.8% YoY).  Further down, while lower petrochemical, CPO prices as well as the stable foreign exchange suggests reduced pressures on its input cost, we believed the feed though will be neutered by the compression in margins over the first half of the financial year – wherein petrochemical prices were elevated. Consequently, cost of sales is expected to tick up slightly to N56.2 billion. Adjusting our numbers for lower FX loss ( -75.6% YoY to N1.3 billion) guides to an increase in earnings with 2019 PAT estimate of N2.0 billion (+9.6% YoY). Over our forecast horizon, we expect earnings to pick up slightly owing to the slow recovery in topline, with our 5-year CAGR at 2.3%. We have FVE of N10.93 on PZ, which translates to a SELL rating based on last trade price. On our numbers, PZ trades at a P/E of 42.9x, which is a premium to its Bloomberg MENA peer average of 32.2x .

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
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