Unilever Nigeria PLC – An uphill battle to profitability

Unilever Nigeria PLC - An uphill battle to profitability

In its recently released unaudited FY’20 financial statements, Unilever Nigeria consolidated on its improved Q3’20 performance after an especially hard year riddled with turnover challenges.

Group topline expanded by 2% y/y to ₦61.6 billion (Vetiva: ₦62.3 billion), supported by a 9% y/y growth in Food Revenue to ₦34.7 billion, even as HPC Revenue moderated 7% y/y.

The topline growth was supported by an impressive 84% y/y expansion in Q4’20 topline to ₦16.8 billion, albeit the line item fell just 3% shy of our expectation. Even accounting for mild price increases this year, we attribute the growth to continued recovery in volumes.

In spite of the higher topline, impairment on receivables fell further under control, printing at ₦5.0 million in Q4’20 compared to ₦429 million in Q3’20 and ₦405 million in Q4’19. We recall that Unilever Nigeria had in 2019, adopted tighter credit policies in order to temper rising impairments. The moderation in the Q4’20 impairments along with the 17% contraction in trade receivables balance suggests that the new policy is yielding fruit.

Unilever Nigeria PLC - An uphill battle to profitability Brandspurng
Source: Company filings, Vetiva Research

Shrunken impairment losses ease pressure on PAT

Meanwhile in line with the increased topline, gross margin for the full year expanded 15ppts y/y to 22% notwithstanding downward inflationary pressures. That said, selling and distribution expenses as well as Marketing and admin expenses declined 11% and 2% y/y respectively, taking total Opex 4% y/y lower to ₦15.8 billion.

However, dragged by ₦1.1 billion in Receivables impairments in FY’20 (largely dragged by 9M numbers), Unilever reported an operating loss of ₦3.1 billion. We however comment that this represents progress, compared to the ₦10.3 billion operating loss reported in FY’19.

In terms of financing, whilst Unilever’s finance costs and income have lowered in response to the low yield environment, the company has continued to maintain positive net finance costs largely caused by a 70% reduction in loans and borrowings.

On a more positive note, net operating cash flow was healthier, driven by a more efficient working capital management. Overall, Loss Before Tax came in at ₦1.8 billion (FY’19 LBT: ₦9.8 billion).

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After adjusting for the mandated minimum tax and a tax credit of ₦0.3 billion, Unilever reported a Loss After Tax of ₦1.6 billion (FY’19: ₦7.4 billion), lower than our ₦2.3 billion loss projection. Thus, Unilever reported an EPS for the year at -₦0.28 (FY’19: -₦0.74).

Milder loss expected in FY’21

Unilever Nigeria’s stable progress on improving volumes should continue into the new year, endorsing our 7% y/y expansion expectation to ₦66.2 billion in FY’21, especially given the still low base in the first half of the year – although we note that the expected divestment of the company’s tea business by the end of the year would dampen Revenue growth.

With respect to the AfCFTA and the re-opened borders, we expect a limited impact on the seasonings market, given that the imported products that had competed with local seasoning makers do not originate from African regions and do not fall under the scope of the AfCFTA.

Based on this, we renew our gross margin projection of 21% for the full year. Despite an expected 5% y/y increase in Opex, we estimate that the company’s operating margin will improve 2% y/y as we do not expect further impairment losses on receivables.

Furthermore, we expect the company’s stability in working capital management to influence operating cash flows positively.

We expect net finance costs to play out much in the same manner as FY’20 and project a slight 4% y/y increase to ₦1.3 billion, largely driven by the expectation of higher yields in the period.

Overall, we expect Unilever to declare a Loss before tax of ₦0.6 billion and a Loss after tax of ₦0.4 billion translating to an EPS of -₦0.08. Our valuation the stock yields a target price of ₦17.89 and we place a BUY recommendation on Unilever.