Unilever Nigeria Plc : Upgrade to BUY on compelling valuations   

13 November 2018 :Unilever Nigeria (Unilever) 9M 18 results came in ahead of analyst's expectation, although largely as a result of the N2.2 billion gain on disposal of the spread business which was effective 01 July 2018. Excluding the gain, EPS for the nine-month period underperformed analyst's estimate due to slower than expected sales and higher than forecasted operating expenses. Having rolled forward analyst's model and raised their operating expenses forecast in FY 19- 23F, analysts arrive at FVE of N47.58 (previous: N50.98). Their FVE implies a 21% upside from current market price hence, analysts upgrade their recommendation on the stock to a STRONG BUY.

Revenue in 9M 18 underperformed analyst's estimate (-1.9% deviation) due to a further slowdown in Home & Personal Care (HPC) sales in Q3 18. After rising double-digit in Q1 18, HPC sales contracted in Q2 and Q3 which analysts link to increased importation of HPC alternatives helped by the improved availability of FX. Analysts had earlier thought that the latest approval from its parent company to distribute its deodorant product – ‘Rexona’ under the popular name “Sure” will support HPC sales over the rest of the year, but it appears the phase out process would take a while and thus see this benefitting revenue beyond 2018. Given this, analysts have revised their FY 18 sales expectation lower by 3% to N99.6 billion, but left their FY 19-23F sales forecast unchanged with a CAGR growth of 7%. Over their forecast horizon, analysts expect the food segment to drive topline growth majorly from its popular seasoning product – “Knorr”. Analysts highlight the resilience of Unilever’s food division which since Q1 18 has remained in double digit growth (+20% YoY in 9M 18) despite the sale of its spread business.

Analysts forecast EBIT margin of 13.9% (previous: 14.1%) over FY 18 and an average of 14.7% (previous: 16%) over their forecast horizon, following upward review to their operating expense forecast. Unilever’s operating expenses surged over 9M 18 with OPEX to sales ratio at 20.2% (+205bps higher than 18.2% as at 9M 17). The increase mainly stemmed from higher overheads and service fees in Q2 and Q3 respectively. While analysts expect service fees to normalize in Q4 given that bulk of the fee was reported in Q3, analysts foresee higher overheads into 2019.

Analysts recall that overheads were particularly high in Q2 18 (overheads to sales ratio of 12% vs. 6.3% in Q1 18) which analysts linked to the sale of its spread business in their last update on Unilever. In Q3 18, overheads to sales moderated to 8% although, still higher than Q1 18 indicating pressures and thus prompting the upward revision of analyst's OPEX to sales to average 19.5% (previous: 18.8%) over their forecast horizon. On balance, with the increase in OPEX, analysts expect EBIT margin of 13.9% in FY 18 and 14.7% on average over FY 19-23F, which still remain higher than 5-year historical EBIT average of 10.4%.

With Unilever’s strong cash position of N46.8 billion, analysts expect the company’s earnings to enjoy support from higher interest income which analysts forecast to print at N3.3 billion in FY 18. Analysts continue to maintain their view that its rich cash will most likely be deployed into expanding its product offerings particularly in the food business which is currently underweight following the sale of the spread business. Irrespective, with analyst's expectation of tamer finance costs going forward following deleveraging of its balance sheet (debt/equity at 0% as at 9M 18), analysts forecast net finance income of N2.6 billion in FY 19.

Net impact of the above translates to an EPS at N2.11 in 2018, but N2.04 in FY 19. Analyst's lower EPS forecast in 2019 is due to the high base of FY 19 which has in it the one-off disposal of the spread business. Excluding the spread business, analyst's revisions translate to a PBT of N14.6 billion and N17.2 billion in FY 18 and FY 19 respectively. Over their forecast horizon, analysts forecast EPS to rise by a 5-year CAGR of 6.7%. On this numbers, analysts forecast dividend of N0.60 in FY 18 and FY 19 which translates to an expected dividend yield of 1.5% based on the stock current market price.


Following revision to their forecasts, analysts cut their FVE to N47.58 (previous: N50.98) which implies a 20.4% premium to current pricing thus, analysts upgrade their recommendation to a STRONG BUY. On their numbers, Unilever trades at a 2019 P/E of 19.2x, a discount to 5- year historical average of 29.8x and Bloomberg MENA peer average of 21.6x.

Reporting for EasyKobo on Tuesday , 13 November 2018 in Lagos, Nigeria

Source: Feyisike Ilemore from ARM Securities Limited


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