Unilever Nigeria Slips Into A Loss Position Despite Impressive Revenue Growth

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Unilever Nigeria Plc recorded double-digit growth of 46% YoY to N19.45bn in Q1 2021 from 13.33bn in Q1 2020 according to its recently released financial statements.

However, the cost of sales grew faster by 51% to N14.95bn from N9.90bn in Q1 2020. Nonetheless, gross profit grew by 31% YoY to N4.48bn in Q1 2021 from N3.43bn in Q1 2020.

In Q1 2021, operating expenses rose by 58% YoY to N4.64bn from N2.95bn in Q1 2020 owing to higher marketing and administrative expenses. Consequently, the Group recorded an operating loss of N165mn in Q1 2021, from an operating profit of N453mn in Q1 2020.

Unilever’s profitability deteriorated to a loss before tax of N13mn in Q1 2021 from a profit before tax of N948mn in Q1 2020, on the back of a 69% YoY decline in net finance income to N152mn in Q1 2021 from N495mn in Q1 2020.

Revenue Growth Underpinned by Branding and Marketing Efforts

Further analysis of revenue according to its operating segments showed that the Household and Personal Care grew by 53% YoY to N9.03bn in Q1 2021 from N5.92bn in Q1 2020. Also, Food products, the highest contributor to revenue,  grew by  40%  YoY to  N10.40bn  in  Q1  2021  from  N7.41bn  in  Q1  2020.  The breakdown of marketing and administrative expense revealed a 63% increase in brand and marketing cost to N1.31bn in Q1 2021 from N800mn in Q1 2020. We believe the increase in brand marketing cost factored in the double-digit growth across all operating revenue segments.

Elevated Operating Expense Suppresses Operating Profit Margin

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Operating expense rose by 58% YoY to N4.64bn in Q1 2021. Notably, selling and distribution expenses grew by 36% YoY to N838mn in Q1 2021 from N617mn in Q1 2020. Although the selling and distribution expenses increased,  the margin improved marginally to  4%  in  Q1  2021  from  5%  in  Q1  2020.

Also, marketing and administrative expense grew by 63% YoY to N3.80bn in Q1 2021 form N2.33bn in Q1 2020 on the back of higher overheads and branding costs.

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The overall operating expense Margin worsened by 200 basis points to 24% in Q1 2021 froM 22% in Q1 2020. As a result of the increased operating cost Margin, operating profit Margin contracted to a -1% in Q1 2021 froM 3% in Q1 2020 which translated to the loss recorded in the period under review.

Weak Net Finance Income Worsens Bottomline Loss Position

Net finance income contracted by 69% to N152mn in Q1 2021 from N495mn in Q1 2020. Specifically, the contraction in net finance income was driven by a 62% decline in interest on call deposits and bank accounts to N21mn in Q1 2021 (Q1 2020: N214mn). Therefore, the combination of the weak net finance income and the effect of the operating loss, effectively worsened the Group’s bottomline.

Other News

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The Group declared its intention to separate its global tea business including the retail and food solutions businesses, plantations, T2, and Puka (the “Tea Business”). Subject to regulatory approvals, the Nigerian Tea Business would be transferred to a newly incorporated tea company in Nigeria (“New TeaCo”), held under a newly incorporated tea holding company to create a dedicated tea group within the Unilever Group (“TeaCo Group”).

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Unilever Nigeria Slips Into A Loss Position Despite Impressive Revenue Growth-Brand Spur Nigeria
Unilever Nigeria Slips Into A Loss Position Despite Impressive Revenue Growth-Brand Spur Nigeria

Outlook

We note Unilever’s effort in reMaining coMpetitive as witnessed by the growth in revenue. Yet, the Group still struggles with cost pressures aMid the MacroeconoMic challenges. We revised the revenue growth estiMate froM 5% to 27% in FY 2021 on the assUMPtion of price increases. We also posit that the Group would intensify its cost ManageMent efforts towards realising the gains froM revenue growth. Hence, we expect a rebound to profitability and estiMate a profit after tax of N1.46bn for FY 2021.

Using a blend of Discounted Cash Flow, Discounted Dividend, Residual IncoMe, and EV/EBITDA valuation Methodologies, we arrived at a revised fair value of N9.76 (previously: N9.48). At the stock’s current Market price of N11.90, the total return estiMate stands at -17%. Hence, we believe that the stock is currently overvalued and recoMMend SELL.

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