Unilever Nigeria — Impairment Cost Weighs On Cost Optimisation Efforts

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Unilever Nigeria Plc consolidated its recovery efforts as evidenced in its Q4 2020 financial statements. Revenue grew 2% YoY from N60.49bn in FY 2019 to N61.96bn in FY 2020. Gross profit rose 169% YoY to N12.80bn in FY 2020 from N4.75bn in FY 2019, owing to a significantly lower cost margin in FY 2020.

Operating loss improved by 48% YoY from N11.76bn in FY 2019 to N6.07bn in FY 2020. A decline in operating expense by 8% YoY from N16.40bn in FY 2019 to N15.16bn in FY 2020 supported the reduction in the operating loss. However, an impairment loss on trade receivables which stood at N3.77bn in FY 2020 (FY 2019: N200mn) partially offset the cost savings recorded.

Loss before tax improved 53% YoY from N9.75bn in FY 2019 to N4.59bn in FY 2020 while loss after tax improved 47% to N3.97bn in FY 2020 from N7.42bn in FY 2019.

Pandemic-Driven Opportunities Boost Sales

The revenue breakdown of operating segments revealed that the Food products segment improved by 7% from N31.78bn in FY 2019 to N34.11bn in FY 2020 while the Household and Personal Care (HPC) Products segment declined by 3% from N28.71bn in FY 2019 to N27.85bn in FY 2020.

On the Food Products segment, we attribute the revenue growth to coronavirus-induced demand, as households made panic-buys to stock up ahead of the lockdown policies implemented by the national authorities. On the other hand, we believe that the decline in the HPC products segment was due to increased competition during the period.

Improved Bottom-line Amid Cost Optimization Efforts

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Cost margin improved to 79% YoY in FY 2020 from 94% in FY 2019 on the back of a 12% decline in cost of sales to N49.16bn in FY 2020 (FY 2019: N55.73bn).

The major cost decline driver resulted from a 19% YoY decline in raw materials and other related costs from N46.25bn in FY 2019 to N37.35bn in FY 2020. As a result, gross profit grew by 169% YoY from N4.75bn in FY 2019 to N12.80bn in FY 2020. Operating expense declined by 8% YoY to N15.17bn in FY 2020. Specifically, selling and distribution expenses declined 11%, while marketing and administrative expenses declined 7% YoY.

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However, impairment loss on trade and intercompany receivables weighed down the cost savings gains achieved. Impairment loss on trade and intercompany receivables surged 1785% YoY to N3.77bn in FY 2020 from N200mn in FY 2019.

During the period under review, the Group wrote off N396.31mn worth of bad debt and N2.69bn worth of intercompany receivables.

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The Group incurred a N6.07bn operating loss in FY’2020, an improved level relative to an N11.76bn loss in FY 2019. Although gross profit significantly increased in FY 2020, it was still unable to cover operating expenses, despite the Group’s efforts to lower costs. In our view, we posit that the Group made efforts to protect margins by optimizing costs due to weak income generation, amid persistent macroeconomic challenges.

Loss before tax lowered by 53% YoY, while loss after tax lowered by 47% YoY from a N7.42bn loss in FY 2019 to a N3.97bn loss in FY 2020.

Read Also:  COVID-19 Further Pushes Nigeria's Unemployment Rate Northwards

Outlook

We maintain a weak macroeconomic outlook for the Group in the near to medium term. Specifically, the combination of rising unemployment, low household income, and by extension – weak consumption, and eroding consumer purchasing power is expected to be the major factors limiting the revenue growth prospects for the Group.

The struggle among market players for a share of the consumers’ weakening wallet is also expected to result in competitive pressures for the Group.

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We estimate a 5% YoY revenue growth to N65.35bn, and we expect the Group to rebound to profitability in FY 2021. We project a N383mn profit after tax in FY 2021, as we expect the Group to double down efforts to optimize costs.

Also, we project a N0.04 dividend for FY 2021, after two consecutive years of no dividend to shareholders.

We believe that the Group is in a sufficient liquid position, and we expect to see a stronger cash position in subsequent periods due to the Group’s renewed focus on cash-backed sales. Using a blend of Discounted Cash Flow, Discounted Dividend, Residual Income, and EV/EBITDA valuation methodologies, we arrived at a N9.48 fair value.

At the stock’s current market price of N13.30, the total return estimate stands at -28%. Hence, we believe that the stock is currently overvalued. Therefore, we recommend SELL.

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