Unilever Nigeria Plc: Q2 surprise boosts H1 earnings

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Unilever Nigeria’s H1’21 performance has shown a decent recovery from last year’s pandemic-induced slump. With Q2’21 Revenue expanding 41% y/y to ₦19.7 billion (H1’21: ₦39.2 billion) – mostly boosted by the much lower base in the previous year, it has provided the much-needed boost to the company’s bottom-line in the first half of the year.

Delving into segmental performances for this quarter, whilst both Food and HPC (Home and Personal Care) have continued to grow, 35% y/y and 49% y/y respectively, partly driven by the newly introduced SKUs (Store Keeping Units), the growth is not as impressive as the growth recorded in Q1’21 (40% y/y and 53% y/y respectively).

Apart from the plague of competition in the seasoning and detergent sub-segments, we believe that growth may be waning because Unilever may have reached its supportable level of turnover, following its credit restructuring strategy.

Unilever Nigeria Plc: Weak Industry Fundamentals Weigh on Earnings
Unilever Nigeria Plc: Weak Industry Fundamentals Weigh on Earnings – www.brandspurng.com

In addition, given Unilever Nigeria’s play in the premium seasoning cube segment, we do not see competitive pressures easing especially as consumers grapple with declining disposable income.

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Furthermore, we believe that the separation of its tea business has also impacted the slower return to its pre-pandemic Revenue performance. With this, we consider the Revenue beat in the H1’21 period (Vetiva: ₦36.0 billion) and estimate that the topline will grow 29% to ₦79.7 billion for the FY’21 (previous: ₦72.1 billion).

Margins become stronger on Q2 cost optimization

On a more positive note, and a measure of improvement, gross margin improved 4.5ppts y/y to 27%, much closer to its five-year average of 28%, amid rising costs. This is because in addition to the significant 41% y/y Revenue growth, the cost of sales only rose 27% y/y to ₦14.3 billion.

For the half-year period, the cost of sales rose 38% y/y mostly driven by the Q1’21 performance. Unilever Nigeria’s exposure to foreign-sourced raw materials remains a concern for us especially when we consider foreign exchange volatilities/challenges.

However, taking this year’s track record into consideration, we expect the company’s cost of sales figures to print 18% higher, taking gross margin 6ppts y/y to 27% for FY’21.

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Although Unilever Nigeria has reported a ₦235 million impairment loss on receivables (where it had reported no loss in the previous quarter), bringing operating profit to ₦0.6 billion for the quarter and ₦0.4 billion for the H1’21 period, we do not expect a significant increase in impairment losses for the year. Thus, we expect the current positive operating profit trajectory to maintain for the FY’21 period at ₦1.6 billion.

Unilever Nigeria
Source: Company filings, Vetiva Research

Finance income buoys earnings

Net finance costs have remained positive at ₦0.6 billion for the H1’21 period, driven by the company’s healthy cash balance of ₦44.2 billion. Given that we do not expect any significant CAPEX spend by the company in the near term, we see no dampening impact on cash or a need for increased debt burden and estimate that net finance income will remain buoyed by cash at ₦1.5 billion for the year.

Unilever’s PAT printed at ₦1.2 billion, (Q2’20: ₦1.6 billion), sufficiently covering its loss position from its Q1’21 performance and bringing H1’21 PAT to ₦0.7 billion (H1’20 LAT: ₦0.5 billion). Our expectation for profit for the year has improved to ₦1.7 billion from a previous LAT expectation of ₦0.8 billion.

Thus, we estimate a target price of ₦14.23 and rate Unilever a HOLD.

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