Unilever Nigeria Plc: Q2 surprise boosts H1 earnings

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

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.

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.

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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.

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.