Unilever: Weathering The Impact of Covid-19

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Kayode Tokede 

The financial year ended December 31, 2021 was a recovering year for Unilever Nigeria Plc as the global and domestic economy emerged from the Covid-19 pandemic. 

However, investors needed to be cautious buying into the company’s stock, mainly due to the increasing price competition in the Home and Personal Care (HPC) segments from its brands amid the tight consumer purchasing power.

The company emerged from 2020 losses to impressive performance in 2021, driven by significant increase in revenue and dividend pay out to shareholders but cost of sales and operating expenses remained a threat, calling for caution. 

The Directors recommend to the shareholders the payment of a dividend in respect of the year ended 31 December 2021 of N2.87billion that is, 50 kobo gross per share. 

Unilever Nigeria grew its revenue by 35.07 per cent to N70.52 billion in 2021 from N52.21 billion in 2020, primarily driven by the company’s HPC that gained 47.1 per cent, while the Food segment dropped by 10.6 per cent.

Suitably, the HPC segment in 2021 contributed 56 per cent to revenue from 43.6 per cent, while that of the food segment contributed 44 per cent from 56 per cent in 2020. 

Unilever with 93 distributors in 2021 as against 102 in 2020, the company reported a domestic revenue (within Nigeria) growth of 37.1 per cent to N69.8 billion in 2021 from N50.89 billion in 2020, while Export (outside Nigeria) revenue dropped by 42.7 per cent to N756.5 million from N1.32 billion reported in 2020. 

The company’s revenue growth was supported by higher volumes from its tier four products, launched in 2020, increased investment in its distribution network and marginal price increases in some products.

In addition, increased credit sales to distributors as management loosened its tight credit policy might also support revenue growth. 

Impressive Revenue Growth Offset COS

The impressive revenue growth offset Cost of Sales (CoS) that grew by 22 per cent to N50.16 billion in 2021 from N41.14 billion in 2020 as raw materials and consumable contributed 50 per cent.

The company grew its raw materials and consumable by 33 per cent to N37.97billion in 2021 from N28.53 billion in 2020. Unilever Nigeria’s high exposure to foreign exchange risk remains a key downside risk as the company imports 50per cent of its raw materials into the country. 

Consequently, the proportion of CoS/Revenue dropped from 78.8 per cent in 2020 to 71.13 per cent in 2021. 

The interplay between revenue and CoS lifted gross profit to N20.36 billion in 2021, an increase of 84 per cent from N11.07 billion reported in 2020. The growth in revenue and gross profit contributed to 28.9 per cent Gross margin in 2021 from 21.2 per cent in 2020. 

As regarding operating expenses, Unilever Nigeria reported a 39 per cent increase in selling & distribution expenses in 2021, while marketing and administrative expenses also grew significantly by 42 per cent.

Selling & distribution expenses moved from N2.39billion in 2020 to N3.32 billion in 2021, while marketing & distribution expenses increased to N3.32 billion in 2021 from N2.39 billion in 2020.

For the marketing & administrative expenses, brand and marketing reported in 2021 grew by 77 per cent to N4.82 billion from N2.73 billion in 2020, while overheads         hits N8.44 billion in 2021 from N6.6 billion in 2020. 

Royalties and Service Fees also grew by 42 per cent to N1.87billion from N1.32 billion reported in 2020. 

Unilever Nigeria has Technology & Trademark agreements with Unilever UK Plc to manufacture, distribute and market its international brands. In consideration for this, a royalty of two per cent of net sales value and 0.5 per cent of net sales value is payable to Unilever Plc for technology and trademark licences respectively

In line with the approval from the regulatory authority, National Office for Technology Acquisition and Promotion, the royalty payment for these agreements are capped at N3.47 billion and N 0.87 billion respectively per annum.

Agreement with Unilever Europe

Also, Unilever Nigeria has a central support and management services agreement with Unilever Europe Business Centre B.V (previously Unilever Plc) for the provision of corporate strategic direction, and expert advice/support on legal, tax, finance, human resources and information technology matters. In consideration of this, a fee of two per cent of profit before tax is payable as service fees 

In line with the approval from the regulatory authority, National Office for Technology Acquisition and Promotion, the royalty payment for central support and management services is capped at N 0.11 billion per annum.

From the profit0 & loss figures, Unilever Nigeria’s finance income, thus, dropped by 34 per cent to N1.03 billion in 2021 from N1.55 billion in 2020. The decline in finance income is due to net exchange gain on translation of foreign currency denominated balances to N436.6 million in 2021 from N1.34 billion in 2020.

With finance income dropping, finance cost also dropped by 68per cent to N95.7 million in 2021 from N294.99 million in 2020.  

With the growth in revenue, the company closed 2021 financial year with profit before tax of N1.88billion from N4.54 billion loss before tax reported in 2020. Unilever Nigeria’s profit for the year migrated from a los of N3.97 billion to N3.41billion in 2021.

Consequently, Earnings Per Share (EPS) turned positive at N0.59 (including gains from the tea business disposal) compared to the loss per share of N0.65 in 2020. Adjusting EPS for the disposal gains, EPS outturn was still positive, albeit lower at N0.12.

Hike in trade, Other Payables

As Unilever Nigeria grew total assets by 18.33 per cent to N108.3billion in 2021 from N91.52billion, as contribution from trade and other payables played a critical role.

Although the company’s long-term assets dropped by 19per cent to N22.4 billion in 2021 from N27.54 billion in 2020, short-term assets grew by 34.27 per cent to N85.91 billion in 2021 from N63.98 billion in 2020. 

Trade and other receivables from short-term assets increased to N14.99 billion in 2021 from N12.96 billion in 2020. 

Unilever Nigeria disposed of its tea business to Unilever Tea MSO Nigeria Limited, a related party within the Unilever Group,  for a considerable amount of N5.4 billion in 2021. 

The Unilever tea business was included in the discontinued operations segment of the financial statement, which revealed that the company had also disposed of property, plants and equipment as well as long service award obligations.

Before the company’s business was discontinued in October 2021, it had a turnover of N9.05 billion from January – to September 2021, a 7.17 per cent decline from what it generated in the corresponding period of 2020. However, the tea business moved from a loss position to rake in a profit of N2.72 billion in the nine-month period of 2021.

Trade and other payables closed 2021 at N39.74 billion from N27.42 billion in 2020, to thrust current liabilities to N40.22 billion, an increase of 45 per cent from N27.8 billion reported in 2020. 

The company closed the 2021 financial year with long-term liabilities of N2.31 billion from N1.59 billion in 2020. In addition, total liabilities grew significantly, by 45per cent to N42.53 billion in 2021 from N29.39 billion in 2020. 

Subsequently, total equity gained nearly six per cent to N65.76 billion in 2021 from N62.13 billion in 2020. 

Analysts Predict Positive Earnings

According to analysts at Cordros securities, “Overall, we expect the company to maintain positive earnings in 2022E, underpinned mainly by double-digit topline growth. With a revised target price of N12.63, we retain our “HOLD” recommendation on the stock.”

The company added that, “Volume-led growth to support sales in 2022E: For 2022E, we believe management’s strategy to focus on the mass mainstream segments by reinvesting heavily in its tier 3and 4 brands with lower prices bode well for volume expansion in the HPC segment.

“Thus, we forecast revenue will grow by 6.3 per cent in 2022E. Further out, we estimate a revenue CAGR of 5.5 per cent over 2022 – 2026E. 

“Although management stated its intention to source raw materials locally to abate its FX losses, we do not expect a material impact on earnings in the near term. Thus, we model a 55basis points decline in the 2022E gross margin, reflecting the impact of elevated cost pressures. 

“Nonetheless, we forecast a 97 basis points increase in EBITDA margin to 7.6per cent, as we estimate a lower OPEX-to-sales ratio (2022E: 26.1per cent | 2021FY: 27.3per cent). Overall, we estimate that EPS will decrease by 55.5% y/y to N0.26 in 2022E. Adjusting 2021FY EPS for the disposal gains (EPS: NGN0.12), we estimate 2022E EPS will grow by 116.7per cent y/y.”

On valuation, they noted that, “the net impact of our changes is an upward adjustment in our price target to N12.63 (previously: N12.52). Hence, we maintain our “HOLD” rating. On our estimates, Unilever trades at a 2022E P/E of 50.7x, a significant premium to the MEA peer average of 16.7x.”