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Unilever: Quarterly performance reveals H1’16 earnings reality


Unilever Nigeria Plc has released its unaudited interim financial statements for the six months (H1) period ended June 30, 2016.

The results

The results open to the investing public at the Nigerian Stock Exchange (NSE) shows the company’s revenue H1’16 revenue rose to N32.277billion from N28.721billion in the corresponding half-year period of 2015.

Gross profit rose to N10.353billion from N9.750billion in H1’15; while the company’s H1’16 operating profit stood at N2.161billion from N1.566billion in H1’15.

Unilever reported H1’16 profit before taxation (PBT) of N1.487billion from N94.070million in H1’15; while after tax profit for the period stood at N1.093billion from N85.573billion in H1’15.

Meanwhile, the company’s income statement for three months (Q2) ended June 30, 2016 shows revenue of N15.495billion against N13.810billion in Q2’15. Gross profit declined to N4.320billion from N4.688billion. Profit before taxation stood positive at N67.912million from N770.672million loss before taxation in Q2’15; while the company’s profit for the Q2’15 period was N52.195million from N504.875million loss in Q2’15.

In the review H1’16 period, the company’s basic and diluted earnings per share stood at N0.29 from N0.02.

Analysts comment

From current price of N33, research analysts at Vetiva Capital Management Limited reviewed downwards to N15.76kobo being their price target for Unilever Nigeria plc shares. On their part, research analyst at FBNQuest in their first reaction to Unilever results said “we still believe the shares are overpriced and expect the market to react negatively to the company’s Q2 numbers. We rate the stock underperform. Our estimates are under review.”

Listed on the consumer goods sector of the NSE main board (personal/household products sub-sector); the market capitalisation of Unilever Nigeria plc stood at circa N124.848billion with shares outstanding of 3,783,296,250 units.

According to Pabina Yinkere team of analysts at Vetiva Capital Management Limited, currency weakness eats into Unilever Q2 profits. They analysts noted that Unilever sustained the sales momentum for the third consecutive quarter “with the H1’16 financial results showing a 12% y/y revenue growth, in line with our estimate.”

“This was driven by strong performances in both the Food and Home segments, up 22% y/y and 25% y/y respectively. We believe Unilever would have benefitted from intense promotional campaigns and investments in route to market in the past year. The Personal Care segment however continued to underperform, posting a 12% y/y sales decline. Whilst cost of sales rose 16% y/y (6% above our estimate), a 54% y/y moderation in net finance charges and relatively unchanged operating expenses served as support for the bottom line. Overall, PAT rose to N1.09 billion (H1’15: N86 million), however 35% below our N1.69 billion estimate,” Vetiva Capital analysts added.

“Whilst Q2’16 revenue came in line with our estimate, the topline declined 8% q/q amidst heightened pressure on consumer wallets in the period. Amidst sustained currency weakness in the quarter, Unilever’s Gross margin moderated 806bps q/q to 28% given its exposure to imported raw materials such as palm oil and tallow.

“This suggests that the company might have been unable to pass on the higher costs to consumers given the tough macroeconomic landscape. Whilst H2 historically throws up better numbers relative to H1, we remain cautious about UNILEVER’s ability to sustain this run rate amidst tight consumer wallets and persistent macroeconomic headwinds. Given this, we have maintained our turnover forecast for FY’16 at N62 billion, which implies a 4% y/y growth.

We believe we will continue to see translated effects of higher input prices following the naira devaluation with sustained pressure on the company’s gross margin. That said, our net earnings forecast has been revised downwards to N1.85 billion (Previous: N2.59 billion) amidst rising costs. Consequently, our 12-month target price is also revised slightly downwards to N15.76 (Previous: N16.25),” Vetiva analysts further stated.

Jumoke Okeowo team of research analysts at FBNQuest said, “We believe the company was able to grow its top-line because of reduced competition (imported products). Importers of food and household products have found it challenging to source FX. Those able to source FX have struggled to increase prices due to the fragmented and low-switching-cost nature of the industry.

We believe the gross margin contraction was also due to FX challenges following the adoption of the CBN’s new flexible exchange rate regime and the naira’s downward move to c.N280 per US$ from around N199 previously. We believe the company imports about 15% of its raw materials. Although the devaluation of the naira has eased supply of FX slightly, challenges still remain for both Unilever and competitors.”

“As such, we expect FX issues to continue to weigh on the company, both in terms of reduced demand from consumers and margins. Unilever management has not guided the market on their outlook for some time, hence the wide disparity between our forecasts (and consensus) and the actual reported figures.

Following the weaker-than-expected results, we expect to see downward revisions to consensus estimates. Year to date, Unilever shares have shed -23.7%, significantly underperforming the NSE ASI which has gained +0.6%. On our published estimates, Unilever shares are trading on a 2016E P/E of 44.3x (compared with the 29x the broad universe of consumers are trading on)”, FBN Quest analysts stated.

About the company

Unilever Nigeria Plc shares are listed on the Nigerian Stock Exchange (NSE). The Company is principally involved in the manufacture and marketing of foods and food ingredients, and home and personal care products. It has manufacturing plants in Lagos and Agbara.

As shown in the company’s unaudited interim financial statements for the six months ended June 30, 2016, Unilever is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro and USD. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities.

The company manages this risk mainly by hedging foreign exchange currency contracts. As at June 30, 2016 the unhedged financial assets and liabilities amounted to N7.9 billion (2015: N2billion).

At the reporting date, Unilever held cash in bank was N8.6 billion (2015: N1.5 billion). Unilever also had N4.1 billion overdraft (2015: N4.5 billion).

Unilever is segmented into Food Products (FP), Personal Care (HC) and Home Care (PC) products. Foods – including sale of tea, savoury and spreads; Home Care – including sales of fabric care, household cleaning and water purification products; and Personal Care – including sale of skin care and oral care products.

The company’s authorised number of ordinary shares is 6,053,274,000 units with a par value of 50kobo per share. Of these, 3,783,296,250 ordinary shares have been issued and fully paid.