Earnings Report /

Unilever Nigeria: Q219 – Top line pressures weigh on earnings; reiterate Hold

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

    Tellimer Research
    7 August 2019
    Published by

    We maintain our target price for Unilever (Unilever NL) at NGN33.45. With an ETR of 8%, we reiterate our Hold recommendation.

    Unilever reported a 30% yoy decline in net income for Q2 19, although it was still a sharp recovery from its very weak Q1 19 performance. The negative yoy bottom line trend was due to: 1) top line contraction (-2% yoy), weighed by the Home and Personal Care (HPC) segment, which was more impacted by weak consumer spending; and 2) higher production costs due to an uptick in depreciation charge. On a positive note, earnings rebounded qoq, with top line and bottom line expanding by 22% and 33% respectively. The positive quarterly trend was largely due to the impact of a lower Q1 19 base – a period in which general elections were believed to have hampered production activity.

    Maintain Hold rating with TP at NGN33.45 and ETR of 8%. We maintain our tepid view on Unilever’s earnings for the rest of the year as we expect volume pressures, particularly in HPC, to weigh on performance. During the FY 18 earnings call, management guided towards price increases in H2 19, but current volume pressures could stall implementation. Unilever is trading at FY 19f P/E and EV/EBITDA of 19.1x and 14.2x, a premium to the frontier peer average of 17.9x and 12.8x respectively.

    Higher depreciation expense was a major drag on yoy performance, and largely contributed to the 12% yoy decline in EBIT. Encouragingly, EBITDA was up 2% yoy with EBITDA margin improving 0.8ppt yoy to 23%, and finance cost pressures eased further as a net finance income was recorded in the quarter

    Net operating cash flow fell 49% yoy, in line with the sector trend, due to an uptick in receivables, but improved qoq as operating profit trended higher. Management hinted at possible product launches in H2 19, which could explain the rise in capex/sales to 6.3% in Q2 19 from 5.0% in Q2 18.