Unilever Beats Market Expectations

Amidst depressed consumer demand and foreign exchange challenges, Unilever Nigeria beat market expectations in 2016, writes Goddy Egene

“Although the challenges in the operating environment are yet to abate, we have continued to see sustained momentum behind recent cost and operating efficiency initiatives taken by management. We remain focused on driving cost & operating efficiencies, growing market share across key categories and reinvesting behind our core brands,” these were the words of assurance by Unilever Nigeria Plc board and management to shareholders last year.
When the company released its audited results for the year ended December 31, 2016, Unilever Nigeria did not only translate those initiatives into higher profit but also delivered higher dividend to shareholders.

Financial performance
The performance showed sustained growth and resilience even under depressed economic conditions as turnover rose by 17.8 per cent to N69.77 billion, showing a 17.8 per cent increase from N59.22 billion in 2015.
Mirroring the rising costs particularly raw material costs that are significantly exposed to foreign currency volatility and the rising cost of doing business generally in the economy, cost of sales increased by 29.6 per cent from N38.2 billion in 2015 to N49.5 billion in 2016.

The cost of sales reflects an exchange revaluation loss of N1.7 billion in 2016. However, adopting a cost reduction strategy, marketing and administrative expenses reduced by 16 per cent from N13.1 billion in 2015 to N11.6 billion in 2016, just as other income grew by 60 per cent to N124 million from N77.5 million in 2015
Net finance costs reduced by 40 per cent to N1.7 billion in 2016, down from N2.8 billion recorded in 2015. A further analysis of the performance indicates that the company recorded lower cost following lower interest paid on and exchange gain released on foreign loan obtained from Unilever Finance International AG.

The company increased its loans and borrowings by 176 per cent from N7.426 billion to N20.501 billion in 2016. Substantial part of the loans (N15 billion) came from Unilever Finance International, which attracted an interest rate of 6.45 per cent, compared with N5 billion borrowed locally and attracted 13.9 per cent.
Also, the net finance cost as a function of operating profit improved significantly to 29 per cent in 2016, compared with 62 per cent in 2016, reflecting improvements in cash management.

In all, profit before tax jumped from N1.771 billion in 2015 to N4.106 billion in 2016, improving the profit before tax margin to 5.9 per cent in 2016, from 2.9 in 2015.
Profit after tax soared by 157 per cent to N3.07 billion in 2016, from N1.19 billion in 2015, making the company to end the year net margin of 4.4 per cent, up from 2.0 per cent in 2015.
Based on the improved bottom-line, the directors have recommended a dividend of 10 kobo per share, which is a 100 per cent increase above the five kobo per share paid in 2015.

Going forward, Unilever Nigeria assured shareholders of its efforts to ensure a sustained and steady growth in the company’s operations to achieve better returns on their investments.
“Although Unilever Nigeria has not been insulated from the tough economic environment, we have remained focused on our short and long term growth ambitions with clear emphasis on operational intensity, cost efficiencies and growing market share across key categories,” the company said.

Analysts Assessment
Looking at the performance of the company, analysts at Afrinvest (West Africa), said it is a commendable revenue performance which rose 17.8 per cent amid harsh economic condition as the company continues to solidify its food product segment which accounted for 52.2 per cent of total revenue.
According to them, notwithstanding the increase in cost of sales, marked moderation in operation expenses (opex) ratio and net finance charge boosted PBT and PAT significantly by 131.9 per cent and 157.6 per cent respectively .

They explained that amid tough macroeconomic conundrum that enveloped the operating environment, Unilever Nigeria succeeded in delivering a superlative performance after growing its revenue 17.8 per cent (up from N59.2 billion in 2015 to N69.8 billion in 2016), the strongest annual growth rate recorded since 2011 and above their revenue projection of N65.1 billion.

“The food products, home care and personal care segments accounted for 52.2 per cent, 22.6 per cent and 25.5 per cent respectively with the food and home care segments contributing the most to growth. We attribute Unilever’s resilience to the non-discretionary nature of its products, which are mostly price inelastic despite the stiff competition in the industry. In line with the cost-push nature of inflation in 2016, Unilever recorded more pressure from its direct cost components as its cost of sales rose faster by 29.6 per cent as cost to sales margin deteriorated to 70.9 per cent from 64.5 per cent in 2015. Surprisingly however, operating expenses declined 11.3 per cent Y-o-Y with the opex margin moderating to 20.9 per cent in 2016 from 27.8 per cent in 2015,” Afrinvest said.

The analysts noted that impressively, operating profit also improved 25.1 per cent (up from N4.6 billion to N5.8 billion) while finance charge dropped by 40.8 per cent to boost PBT which surged 131.9 per cent (up from N1.8 billion in 2015 to N4.1 billion in 2016).
“A further moderation in tax rate from 32.7 per cent in 2015 to 25.2 per cent in 2016 impacted positively on PAT which rose 157.6 per cent (up from N1.2 billion to N3.1 billion). Against this backdrop, return on average equity (ROAE) and return on average asset (ROAA) improved significantly to 33.9 per cent and 5.5 per cent in 2016 from 14.4 per cent and 2.6 per cent in 2015 while earnings per share (EPS) grew from N0.32 to N0.81.

Outlook and Valuation
The analysts said Unilever’s product portfolio has shown resilience amid rising domestic macroeconomic risks, pressured consumer income and changing consumer taste.
According to them, they are of the view that the company is devising strategies to weather the storms of FX challenge (a major drawback to re-stocking raw materials for its products) while price inelasticity of the products makes cost pass through to customers less herculean.

“We adjusted our assumptions for Unilever in tune with recent realities and project revenue and PAT for 2017 to grow 10.0 per cent and 34.2 per cent to N76.8 billion and N4.1 billion respectively. Our blend of absolute and relative valuation methodologies resulted in a revised target price of N36.59 from previous N29.30 implying 4.5 per cent upside to the market price on 3/4/2017. We therefore upgrade our February recommendation from “sell” to “hold,” they said.