Unilever Nigeria Plc recently released its second-quarter results, which showed a rather disappointing, but expected numbers. Specifically, revenue declined by 40% year-on-year (YoY) from N23.42bn in Q2’19 to N14.01bn in Q2’20.
The Company recorded an operating loss of N1.86bn in Q2’20, compared to an operating profit of N2.54bn in Q2’19. The loss incurred stemmed from the lower revenue generated in Q2’20.
In our view, we believe that the poor revenue performance was partly driven by the double-whammy of lower demand and lower supply induced by the outbreak of the COVID-19.
However, we note that prior to the outbreak of COVID-19, the Company was faced with a declining market share, particularly on its Food business segment. In an earnings conference call organised by the Company after the release of Q1’20 earnings result, the management revealed that cheaper alternative products from China were eroding market share for the Company.
In addition to the impact of increased competition in the market, the sustained land border closure also took its toll on revenue performance. The land border closure limited export sales to neighbouring countries such as Ghana and Ivory Coast.
The decision of the Company to tighten credit to distributors resulted in a significant decline in the wholesale channel of the Company, thus resulting in lower sales. However, on a positive note, the decision resulted in higher cash flows generated in H1’20.
The Company’s cash balance grew by 46% YoY from N30.61bn as of H1’19 to N44.57bn as of H1’20. The increase in cash resulted from lower receivables, lower inventory levels, and delayed payments to creditors.
Furthermore, we believe that the pressure on consumer spending in the economy resulted in the downgrading of products from premium to lower-tiered products.
Overall, the Company recorded a loss before tax of N1.52bn in Q2’20, from a profit before tax of N2.67bn in Q2’19. A loss after tax of N1.63bn was incurred as well, relative to a profit before tax of N1.99bn in Q2’19.
As stated in our previous report after the release of the Company’s Q1’20 earnings result, we expected to see continued pressures on revenue due to increased competition and lower demand.
We also expected the Company to optimise costs to protect margins. In Q2’20, operating expenses lowered by 18% YoY from N4.93bn in Q2’19 to N4.02bn in Q2’20.
Based on our assessments, we maintain our outlook. Although we note the gradual reopening of the economy, we yet remain cautious about a significant rise in the level of economic activities.
In our view, we do not see an immediate significant rise in consumption levels. Also, we posit that the tight credit policy by the Company will be sustained, however, we think that the impact would be less severe in H2’20 due to a low base in H2’19.
On the decision to tighten credit terms, we postulate that the policy is aimed at maintaining quality assets. The Company also decided on a tighter credit policy to enhance liquidity and reset its industrial and cost base.
As of H1’20, a total cash balance of N44.57bn sat on the Company’s balance sheet. The bulk of the cash came from the N57.75bn net proceeds from the Rights Issue done in FY’17.
During the capital raising exercise, the Company intended to deploy capital to deleverage its balance sheet, support its working capital needs and position the Company to invest in growth opportunities.
While the first two objectives have been achieved, the Company is yet to invest in growth opportunities due to the weak industry growth amid macroeconomic vulnerabilities. However, we think that holding excess cash could result in value destruction for shareholders.
We maintain our SELL rating on the stock; however, we raise our fair value from N1.07 to N2.91. The higher fair value was due to our expectations of an improved cash flow generation during our forecast years.
We lowered our capital expenditure assumptions due to the low demand and low industry growth. Our cost of equity estimate was also adjusted to reflect the currently lower risk-free rate in the fixed income market.
In our view, the fundamentals of the industry are very weak, and we see the low growth being sustained in the near to medium term. At current market prices, the stock trades at a 77% premium to our fair value.