Pros and cons of Unilever Nigeria proposed share sale

Unilever Nigeria plans to raise N63 billion from existing shareholders but should they exercise their rights?

                                                                                                                                    Fig 1: Unilever Nigeria 5yr chart

                                                                                    Source: FX Markets data

Unilever Nigeria said last week it will seek shareholder approval next month to raise N63 billion ($200 million) through a rights issue.

The maker of foods, homecare and personal care products also said it would seek approval to increase its authorised share capital to N5 billion naira by creating an additional 3.95 billion new ordinary shares of 0.50 naira each.

The local unit of Unilever plans to seek a vote at a shareholder meeting on May 11, it said in a notice, adding that it would also ask for approval to convert shareholder loans to stock as part of the share sale.

Unilever closed trading at N33.25 per share on the Nigerian Stock Exchange (NSE) on Thursday (last day of trading before the Easter holidays).

Assuming 3.95 billion new shares are created at N33 per share, it would mean the company will be able to easily raise more than the N63 billion ($206million), it plans to raise in its rights issue.

Unilever plans to convert its outstanding Foreign Currency Loan (FCY) of N15.146 billion from its parent company Unilever Finance International AG into equity.

Management has scheduled a meeting with shareholders for the 11th of May 2017, aimed at garnering approval for the rights issue before proceeding to obtain regulatory consent.

The new issue of 3.9 billion new shares will bring total shares outstanding to 7.7 billion (up from 3.8 billion in 2016), potentially diluting existing shareholders.

A debt to equity conversion is positive for the firm as it eliminates FX loan servicing and repayment risk.

Unilever is exposed to foreign exchange risk arising from various currency exposures.

At 31 December 2016, the unhedged financial assets and liabilities amounted to N11.1 billion (2015: N2.1 billion).

According to the firm if the Naira had weakened/strengthened by 76 percent (the 5 year average change in the conversion rate of key currencies to Naira) against key currencies (Euro and USD) to which the Company is exposed to, with all other variables held constant, post-tax profit for the year would have been N6.4 billion higher/lower.

The Debt-Equity conversion however may enable the parent company (Unilever UK) increase its stake currently at around 60.06 percent as the parent company may also take up rights of shareholders who fail to exercise their rights.

This may not be particularly popular with minority Nigerian shareholders as seen by the parent company’s unsuccessful tender offer of 2015.

Gearing levels for the firm should however fall if a successful debt to equity conversion were to take place.

This should be positive for the firms bottom-line as Unilever Nigeria paid N2.575 billion as interest expense in 2016, equivalent to 84 percent of its reported net income.

Valuation

Unilever Nigeria currently trades at a trailing twelve months Price Earnings (PE) ratio of 42.2 and Price to Sales (P/S) ratio of 1.80.

This compares somewhat favourably to Hindustan Unilever of India which trades at a PE of 48.96 and P/S of 6.15.

However potential dilution from Unilever Nigeria rights issue is still a key drag on valuation.

Unilever Nigeria currently trades at the bottom of its long term trend (see Fig 1), potential investors may want to see the shakeout from the rights issue settle before pulling the trigger on this one!

PATRICK ATUANYA