Unilever: Forex illiquidity, pressure on consumers’ disposable income weigh Q3’16 results

Unilever Nigeria Plc recent published its results for the nine months (9M) period ended September 30, 2016.

The results

In the nine months to September, the company’s revenue increased to N49.8bn from N42.6bn in Q3’2015.

Gross profit declined from N14.8bn to N14.7bn; while operating profit rose from N2.37bn to N3.1bn. Profit Before Taxation (PBT) rose from N201.3mn to N1.5bn. The company’s after tax profit for the nine month period rose from N140.9mn to N1.56bn.

The income statement of Unilever Nigeria Plc for the three months (Q3) period to September 30, 2016 showed revenue of N17.5bn from N13.9bn in Q3’15.

Gross Profit was also down from N5.1bn in Q3’15 to N4.34bn in Q3’16; operating profit which stood at N803.7mn in Q3’15 rose to N950.7mn in Q3’16. The Q3 profit before taxation rose from N107.2mn in 2015 to N175mn; while the company’s third-quarter profit for the year rose from N55.3mn to N388.2mn in Q3’16.

Equity price trend

As at Tuesday, the share price of Unilever stood at N48.5, after reaching a 52-week high of N50.01 and 52-week low of N26.60. Unilever Nigeria Plc market capitalisation stood at N183.489bn with shares outstanding of 3,783,296,250 units.

Analysts comments

According to Ifedayo Olowoporoku team of equity research analysts at Vetiva Capital, price increases drove third-quarter revenue higher.

The analysts believe that Unilever’s earnings continued reeling in Q3’16 “as persistent rise in cost of sales overshot growth in revenue, pressured by sustained weakness in the naira. Given that Unilever imports more than half of its total raw materials (particularly palm oil), gross margin contracted 317 basis points (bps) quarter-on-quarter (q/q) following a further 11 percent depreciation in the currency during the period.

We recall the Home and Personal Care (HPC) leader had recorded a huge 806bps q/q contraction in gross margin in Q2 following the introduction of the flexible foreign exchange framework.”

“We are compelled to attribute this topline growth to price increases in the quarter given that the three-month period (July – September) historically records a quarterly slowdown across most Consumer Goods companies. Looking at the segmental breakdown, growth was recorded across all operating divisions (Food, Home and Personal Care) following the price hike – notably, the Personal Care segment recorded its first quarterly revenue growth this year”, the Vetiva researchers said.

“We believe volume performance would have been tepid in the quarter, particularly in the highly competitive Personal Care segment. However, given the resilience of its market leading OMO brand, volumes in the Home Care segment may not have suffered as much. From a geographic perspective, Unilever has managed to record an 80% y/y growth in export revenue as at 9M’16, now accounting for 5% of total revenue (9M’15: 3%). We believe export volumes have reacted positively to the c.58% Ytd depreciation in the currency,” they further stated.

“Sourcing of FX for importing raw materials continues to pose a challenge for Unilever, but we believe this was much worse for its smaller competitors and those companies which import the majority of their raw materials, hence Unilever being able to grow its topline by 26% during the quarter,” according to Jumoke Okeowo-led team of research analysts at FBNQuest.

“We note that competitor PZ Cussons also grew its topline. Despite the healthy sales growth, the devaluation of the naira appears to have taken its toll; we believe this was the main reason for the weak performance on the gross margin line following the CBN’s new flexible exchange rate policy adopted at the end of H1 2016”, the analysts added.

“Year to date, Unilever shares have gained 11.1%, significantly outperforming the NSE ASI which has shed -5.3%. In the last 3 months, the shares are up 45.5% (vs. NSEASI: -3.0%) which we struggle to justify. They are trading at a significant premium to Unilever’s peers in the consumer goods sector. We believe the shares are overpriced and expect to see a sell-off following these Q3 numbers,” according to the FBNQuest researchers analysts.

Management’s view

In a statement released by the company, Unilever Nigeria said “the operating environment appeared even more turbulent as trading conditions remained difficult in the third quarter of 2016 amidst rising costs, increase in interest rates, foreign exchange illiquidity and pressure on consumers’ disposable income. However, we have continued to navigate the challenging operating terrain through dynamic planning and optimization of resources.”