Unilever Nigeria Plc – Tougher operating environment: Will Unilever thrive?

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Unilever’s earnings for the first quarter of 2019 was rather disappointing, following a decline in sales and pressure from input cost. For us, while we envisaged the poor sales outing in the home and personal care segment, the material decline in the food segment (-24% YoY) was rather surprising. To track back, sales in the food segment expanded by 19% YoY over 2018, with very little support from movement in prices.

While the parent company attributed the drop in sales to trade disruptions related to election uncertainty (a claim we hope to substantiate when Nestle Plc releases its Q1 19 numbers), we believe new competition from smaller brands is starting to take up some of the company’s market share as our discussion with distributors revealed that ex-factory prices are unchanged during the review period. Coupled with input cost pressure, PAT dropped by 47.6% YoY to N1.5 billion (ARM Estimate: N2.6 billion).

Intense Competition and cost pressure to drag earnings. Given the new business landscape, we cut our 2019 sales expectation and made an upward adjustment to our cost estimate to reflect the pressures over Q1 19. On sales, while our views on HPC highlighted in our FY 18 report (See report) is unchanged, our understanding of the new competition in the food segment with “Top tea”, a competition to Lipton reducing its price this year, amongst smaller imported brands.

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Also, the entry of Gino max cubesMamador seasoning cube and DAN-Q cubes also gaining traction, we reduced our growth estimate in the food segment. That said, we expect overall sales to rise by 3.2% YoY to N95.9 billion (previously 7%). Elsewhere, we increased our cost to sales ratio to 72% to reflect the impact of higher raw material prices and higher currency sourcing cost, which guides contraction in margins over 2019 by 238bps YoY to 28%.

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Notwithstanding the moderation in operating expense over Q1 19 as the company relied on its brand equity which did not play out well over the period, we envisage new promotional offers in coming months in a bid to drive sales. That said, we leave our operating expense unchanged with OPEX to sales at 20%. The troika of slower growth in sales, increased raw materials cost and operating expenses drove the changes to our PAT estimate over 2019 to N8.5 billion (-7.3% YoY, previously: N11.6 billion) with related EPS at N1.47 (Previous: N2.01).

Overall, we cut our FVE on Unilever by 13.8% to N35.82 (previously N41.56), which compared to current price translates to an OVERWEIGHT rating. UNILEVER trades at FY 19E P/E of 24.1x, compared to Bloomberg MENA peer average of 16.9x.

 

Research 234 (1) 2701653  [email protected]

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Latest News

Asia Pacific Rayon Raises US$300m from National and International Affiliated Banks to Expand Production Capacity

  • Continued capital expenditure aims to boost production and support the recovery of Indonesian economy
  • Loan agreements aligned with Indonesian Government's strategy to drive investment growth in 2021
  • APR is a member of the RGE group of companies


JAKARTA, INDONESIA - Media OutReach - 12 April 2021 - Asia Pacific Rayon (APR), the largest integrated rayon fiber producer in Indonesia, today announced that it has secured a syndicated loan facility of Rp 4.5 trillion (US$300 million) with national and international affiliated banks. The funding will be used to support continued capital investment in the company's production facilities at Pangkalan Kerinci, Riau Province, Sumatra.

APR is vertically integrated through its supply chain, from renewable fiber plantations to high-value textile development. It commenced operations in 2019 and was formally inaugurated by President Jokowi Widodo in February 2020. APR plans to increase its production capacity over the coming year to capture the strong growth potential of viscose staple fiber (VSF), strengthening its market position in Indonesia and in export markets across the region. APR is a member of the RGE group of companies. Founded by Sukanto Tanoto, RGE manages a group of resource-based manufacturing companies with global operations.

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The syndicated loan participating banks are PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Central Asia Tbk, PT Bank Pan Indonesia Tbk, PT Bank Pembangunan Daerah Jawa Barat, PT Bank Woori Saudara Indonesia 1906 Tbk and PT Bank KEB Hana Indonesia

The joint mandated lead arrangers and bookrunners for the syndicated loan are PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Central Asia Tbk, and PT BANK Pan Indonesia Tbk.

Basrie Kamba, Director, Asia Pacific Rayon, said: "This funding will be used to support continued investment in our operations in Kerinci. Rayon fiber, or viscose, is a textile raw material derived from sustainably managed plantations. As rayon is both renewable and biodegradable, it supports the trend towards sustainable fashion in Indonesia and in other markets around the world."

APR's planned expansion is aligned with the Indonesian Government's strategy to increase investment and boost employment to support the recovery of the country's economy and address the continued impact of the COVID-19 pandemic. Following the passing into law of the Omnibus Bill in October last year to streamline investment and stimulate job creation, President Widodo said last month that investment would be the key factor in achieving 5% economic growth in 2021.

"This loan facility and our continued investment in our operations are evidence of the growth potential of the viscose rayon sector in Indonesia and around the world. We are committed to supporting the Indonesian Government's efforts to improve the investment climate in export-oriented manufacturing industries, and its efforts to create upstream jobs in plantations and the processing of raw materials, and downstream opportunities in textile factories and related businesses," said Basrie.

Hari Setiawan, Executive Vice President of PT Bank Rakyat Indonesia (Persero) Tbk said : "As Representative of JMLAB and all lenders, I hope this collaboration will be useful to support the growth and development of PT Asia Pacific Rayon in increasing production and operations and also supporting the recovery of Indonesia's export growth."

"Support from BCA and other Banks reflect our confidence in APR, and as our contribution to promote a sustainable and environment friendly industry. We hope this cooperation will tighten our relationship as well," said Susiana Santoso, Executive Vice President of PT Bank Central Asia Tbk.


About Asia Pacific Rayon

Asia Pacific Rayon is the first fully integrated viscose rayon producer in Asia. Located in Pangkalan Kerinci, Riau, the company uses the latest production technology to produce high-quality rayon to meet textile needs. APR is committed to becoming a leading viscose rayon producer with the principles of sustainability, transparency and operational efficiency, serves the interests of the community and the country, and provides value to customers. APR is part of the RGE (Royal Golden Eagle) group of resource-based manufacturing companies. Sustainability is fundamental to APR. The APR Sustainability Policy, updated in September 2020, include additional commitments on pulp sourcing and clean manufacturing.


About RGE

RGE Pte Ltd manages a group of resource-based manufacturing companies with global operations. Our work ranges from the upstream, comprising sustainable resource development and harvesting, to downstream, where our companies create diverse value-added products for the global market. Our commitment to sustainable development underpins our operations, as we strive towards what is good for the community, good for the country, good for climate, good for customer, and good for company. RGE was founded in 1973. The assets held by RGE companies today exceed US$20 billion. With more than 60,000 employees, we have operations in Indonesia, China, Brazil, Spain and Canada and continue to expand to engage newer markets and communities. www.rgei.com

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