Unilever Nigeria’s Tight credit terms and lockdown woes derail performance in H1 2020

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Recently, Unilever Nigeria Plc published its unaudited H1-2020 financial result. According to the report, Revenue sharply declined by 35.9%y/y to N27.3bn, amid the continued negative impact of the management’s decision to tighten credit terms since H2-2019, on the y/y volume growth.

Overall, the company recorded a Loss before and after tax of N566.8mn and N519.1mn respectively (vs. Profit before and after-tax of N4.7bn and N3.5bn respectively in H1-2019).

Below, we update our model estimates for UNILEVER, based on the recently published numbers and reassess our expectations for the rest of the year. An underwhelming H1-2020 performance: UNILEVER’s revenue declined in both Q2-2020 and H1-2020 by 40.2% y/y and 35.9%y/y respectively.

Beyond the obvious challenging operating conditions that characterized the period, amid lockdown in the two states where the company’s factories are located (Lagos and Ogun state) in April and May-2020, we believe the management’s decision to tighten credit terms since H2-2019, to address rising trade receivables and excess stock-in-trade, remains a key driver of the sharp decline in revenue.

As expected, the more essential Food segment (-28.5%y/y to N15.3bn) performed relatively better than the Home and Personal Care (HPC) segment (-43.3% to N12.1bn). Overall, competition in the trading environment remained intense, during the period amid declining purchasing power.

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Elsewhere, Cost of Sales sharply declined by 32.4%y/y to N21.2bn, thanks to lower commodity prices induced by the COVID-19 pandemic as well as weaker production activity on the back of weaker demand.

Notably, Gross Margin mildly declined to 22.5% (vs. 26.6% in H1-2019), dragged by the steeper decline in Revenue (-35.9% y/y) relative to Cost of Sales (-32.4%y/y). Additionally, Operating Expenses (OPEX) rose by 1.2%y/y to N7.6bn, spurred by c. 2.0x increase in impairment losses on trade receivables while Operating Loss came in at -N1.4bn (vs N3.9bn profit in H1-2019).

The bottom-line number received less support from Net Finance Income, which remained flat at N844.2bn, as Finance Income (-29.3% to N849.3mn) fell at a relatively slower pace to Finance Cost (-98.6%y/y to N5.2mn).

Also, the company recorded a Loss before and after tax of N566.8mn and N519.1mn respectively (vs. Profit before and after-tax of N4.7bn and N3.5bn respectively in H1-2019).

Working capital management spurs healthy cash positions

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The management’s strategic decision to tighten trade credit terms with trading partners led to 47.6% YTD decline in net trade receivables balance. However, Trade and Other Receivables declined at a slower pace, down 15.8%ytd to N20.3bn.

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Also, Inventory sitting on the balance sheet declined by 17.1% YTD to N9.8bn due to management’s strategy on working capital management as well as the impact of COVID-19 on material sourcing.

Meanwhile, Trade and Other Payables increased by 8.4%ytd to N37.6bn. Consequently, Operating cash flow improved from -N16.04bn in H1-2019 to N9.2bn in H1-2020. Also, its current ratio remained healthy at 2.0x, though marginally lower when compared to FY2019’s 2.1x.

With this performance, UNILEVER continues to sit on an increasingly higher cash balance (now at N44.6bn) compared to peers and relatively debt-free balance sheet (debt/equity down from 1.1% in FY-2019 to 0.7% in H1-2020). At this stage, the strategic intent of the company is unclear as management significantly slowed down on capital expenditure (-84.3%y/y to N427.2mn) in H1-2020.

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H1-2020 as worst as it gets for 2020

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Clearly, the H1-2020 outcomes reflected management’s decision in H2-2019 to tighten terms around credit sales as well as the operational challenges due to restriction in movements across states in Q2-2020.

Although the company was able to carry on partial operations on the basis of the essential nature of its products for personal and home hygiene, operations were carried out under extreme conditions with epileptic support from partners in its value chain, which do not necessarily fall within the government exemptions.

Looking ahead, we expect Revenue in H2-2020 to reflect the recovery in the operating environment as lockdowns are being lifted across states. Also, our optimism is buttressed by the lower base effect in Q3-2019 (when the management implemented the restriction in credit lines) and Q4-2019.

However, dwindling consumer income and intense competitive pressure are likely to constrain overall Revenue growth in H2-2020E. Also, margins and profitability are likely to remain depressed through H2-2020E, due to pressure on consumer spending.

Specifically, we have forecasted a 2.0%y/y decline in Revenue in FY-2020E as we expect a marginal rebound in H2-2020E thanks to the low base effect in H2-2019.

Adjusting our discounted cash flow estimates for the above, we review our year-end target price to N14.86/share largely buoyed by the company’s healthy cash position. Notably, the stock currently trades at a market price of N12.85/share, a 13.5% discount to our year-end Target Price. Thus, we maintain our HOLD rating on the Ticker.

Unilever Nigeria's Tight credit terms and lockdown woes derail performance in H1 2020 - Brand Spur

Unilever Nigeria's Tight credit terms and lockdown woes derail performance in H1 2020 - Brand Spur

United Capital Research

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Unilever Nigeria's Tight credit terms and lockdown woes derail performance in H1 2020 - Brand SpurUnilever Nigeria's Tight credit terms and lockdown woes derail performance in H1 2020 - Brand Spur

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Unilever Nigeria's Tight credit terms and lockdown woes derail performance in H1 2020 - Brand SpurUnilever Nigeria's Tight credit terms and lockdown woes derail performance in H1 2020 - Brand Spur

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