23 July 2018 ( Lagos )

Highlights

• EBIT margin moderates 239bps q/q to 11.3% 

• Strong PAT growth however supported by spike in interest income 

• H1’18 financial statements reflect disposal of Spreads business 

• Positive earnings outlook maintained, Rating remains a SELL 

Earnings estimates deviate on Spreads business discontinuation 

Following the approval of the sale of its Spreads business at the AGM held on the 10th of May 2018, UNILEVER’s H1’18 financial results reflect restated figures that exclude the Blue Band brand across the Company’s financial statements. Notably, assets attached to the business (c.2%) have been classified as Assets held for Sale on the balance sheet, while results of the business are presented under discontinued operations, with Revenue (ex-Blue Band) restated 5% and 6% lower for H1’18 and H1’17 respectively. 

Analysts note that the sale is in line with its Parent Company’s global move to divest the Spreads business across all its subsidiaries to KKR & Co LP. Given that analyst's erstwhile forecasts were inclusive of the Spreads unit, UNILEVER’s H1’18 revenue came in 7% below their estimate at N48 billion (H1’17: N43 billion). However, bottom line for the period still printed 3% above their forecast at N5.6 billion (H1’17: N3.5 billion) driven by a sharp rise in finance income in Q2’18 (up 120% q/q to N1.1 billion) amidst the company’s strong cash position. 

Looking at the quarterly performance, Q2’18 EBIT moderated 21% q/q to N2.8 billion following a 5% q/q revenue decline and 239bps moderation in EBIT margin for the quarter, amidst a spike in Operating expenses. Performance however remained strong on a y/y basis as Q2’18 PAT rose 36% y/y, majorly supported by the aforementioned strong upturn in net finance income. Overall, also supported by the stronger earlier quarter (Q1’18), H1’18 profit after tax came in 60% higher y/y. 

Positive earnings outlook maintained, Rating remains a SELL 

Given that the disposal is effective 1st July 2018, analysts have reflected this in their financial forecasts. Consequently, their Revenue estimates across their forecast period have been cut by c.4% on average, with FY’18 topline revised to N99 billion (Previous: N103 billion), translating to a modest 14% y/y growth. The Blue Band unit appears to be a lower margin unit relative to the whole business - with PAT margin for the unit printing at 5.1% and 6.7% vs. 11.6% and 8.2% for ex-Blue Band in H1’18 and H1’17 respectively. 

As such, despite the downward revision to their estimates, analysts expect margins to remain fairly sturdy. Meanwhile, analysts revise their FY’18 PAT figure 6% higher to N11.0 billion (Previous: N10.4 billion) supported by an upward review to interest income given the outperformance observed in H1’18. Overall, UNILEVER’s 12-Month Fair value is revised to N37.99 (Previous: N34.15), with current market price of N52.00 implying a SELL rating for the stock. 

Reporting for EasyKobo on Monday, 23 July 2018 in Lagos, Nigeria

Source: Vetiva Capital Management Limited