Unilever Nigeria Plc. | Strong Cut to TP; Outlook Still Positive

Unilever Brandspur

Following UNILEVER’s 9M-17 results, we raise 2017F sales estimate by 1.4%, but cut EBITDA and net profit estimates by 1.2% and 9% respectively, on the back of lower other income and higher opex and finance costs. While also lowering our 2018-2019F EBITDA estimate by 0.6% average, we raise net profit estimates by 17% and 15% respectively in 2018F and 2019F, reflecting majorly, our expectation of significant moderation of finance costs over the periods. That said, we cut our TP for the stock by 40% to NGN21.70 and downgrade rating to SELL. The drivers of our TP are increases in (1) shares outstanding by 52%, following the recent listing of additional 1.96 billion shares and (2) cost of capital (WACC) by 158 bps, on the significant deleveraging of the balance sheet.

Following stronger growth in 9M-17, which we believe is both price and volume driven, we raise sales estimates in 2017F by 1.4%, equating to 35% growth forecast for the year. We retain 7.5% and 8% growth estimates for 2018F and 2019F respectively. We reiterate that volume will be crucial to sales growth going forward, and look for better efficiency in promotional activities/RTM initiatives as well as new products launches, especially amidst stronger outlook for competition. In the H1 earnings call, the management hinted on ongoing innovations in the HPC product segment, some of which will be launched in 2018.

The slight reduction of our EBITDA estimates is on the back of (1) increase in operating expenses forecasts – +39% y/y and +20% q/q was recording in Q3-17 following 8% contraction in H1 – reflecting pressure on marketing and distribution spend, on expected resurgence of competition and (2) the reduction of other income estimates, also evident in 9M-17’s -100%. Our revised EBITDA forecasts imply that UNILEVER will achieve an EBITDA margin of 15.8% in 2017F (previously 16.2%), and the modest increase to 16% average in 2018-2019F (previously 16.3%) amidst possible pricing pressure.

We raise estimate for finance costs by 40% in 2017F, evident in the sharp spike experienced in Q2 and Q3-17 following the drawdown of expensive short-term loans. Our cut to the 2018F and 2019F estimates, however, reflects the sizeable reduction of short-term borrowings (63% YTD by end-September 2017) following the completion of the Rights Issue (programme of NGN58.9 billion). Management said it is targeting a debt-free balance sheet by the end of the RI, suggesting finance costs could be lower than we estimated.

The net impact of the above changes is for EBITDA and net profit growth of 79% (previously 81%) and 122% (previously 144%) in 2017F, and 8% and 36% growth in 2018F, respectively. UNILEVER’s share price has moved -8% QtD and +26% YtD, and we estimate the stock is trading on 2018F P/E of 24.7x, a material discount to its five-year historical P/E of 57.2x