UNILEVER NIGERIA PLC: WELL FITTED FOR TOUGH MARKET DYNAMICS IN FY’18

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  • FY’17 Revenue rises 30% y/y despite weak showing in Q4
  • Earnings leapfrog on stronger operating margins
  • Stronger balance sheet position, margins to support FY’18 PAT

Record earnings for UNILEVER in FY’17 despite weaker Q4 sales

UNILEVER released its FY’17 results, reporting record revenue (₦91 billion) and PAT (₦7.5 billion) for the year. Despite a strong 30% y/y Revenue growth, we highlight that the top line came in below our ₦96 billion estimates following an underwhelming sales performance in the fourth quarter. Notably, Q4’17 revenue contracted 10% q/q (Vetiva: +11% q/q) with the quarter reporting the weakest contribution to FY Revenue at 24% (5-year average: 26%). We have observed relatively weaker Q4 performances across most industry players – a trend we attribute to price reduction within the period, necessitated by intensifying competition across the food and HPC (Home & Personal Care) categories even as consumer demand remains weak. For the segmental performance, the Food and HPC segments reported 18% y/y and 44% y/y revenue growth respectively in FY’17 – with the latter now accounting for 53% of the top line, the highest contribution since 2013. Bucking the trend observed across other industry players however, UNILEVER’s Operating Profit margin strengthened significantly in Q4’17 – up c.600bps q/q to 17% (Vetiva: 13%) – with the company’s cost containment efforts supplemented by a ₦1.1 billion income from reversal of excess accruals for goods and services received in previous years. Consequently, FY’17 Operating Profit came in 3% higher than we had expected at ₦13 billion, a significant improvement from ₦6 billion in FY’16. Earnings were further supported by moderation in Interest Expense in Q4 as UNILEVER successfully paid off its outstanding short-term liabilities following capital raised through its Rights Issue. Overall, FY’17 Profit after tax came in at ₦7.5 billion (FY’16: ₦3.1 billion) – 10% better than our estimate. The Board of Directors declared a dividend of ₦0.50/share (FY’16: ₦0.10, Vetiva: ₦0.30).

Stronger balance sheet, stable margins to support earnings

We maintain our expectation of more intense competition across the Consumer Goods space in 2018. Also, we expect abating cost pressures to provide a leeway for further price cutting as the companies look to support volume growth within the year. Noting the trend observed in Q4’17, however, we are more cautious on revenue growth in FY’18 even as consumer spending remains weak. As such, we revise our FY’18 revenue growth estimate lower to 10% y/y (Previous: 15%). Notwithstanding, we believe UNILEVER is poised to deliver strong earnings in FY’18 noting recent deleveraging as well as sustained margin improvement. Despite our positive outlook on inflation and UNILEVER’s proven ability to keep costs well contained, we expect FY’18 operating profit margin to moderate to 13% (FY’17: 14%, Previous: 12.5%) amidst expected reduction in average prices. Overall, we forecast FY’18 Profit after tax of ₦9.5 billion (Previous: ₦9.1 billion) – translating to a 27% y/y growth. Further supported by our lower risk-free rate assumption (following moderating interest rate environment) and a stronger cash position, our 12-Month Target Price is revised to ₦33.72 (Previous: ₦23.60) and maintain a SELL rating. UNILEVER trades at a premium to its peers, on a current (42.2x, Peers: 29.5x) P/E basis.

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