We lower our target price for Unilever Nigeria (UNILEVER NL) to NGN33.45 (previously NGN40.12). With an ETR of 11%, we maintain our Hold rating.
Subpar Q1 19 earnings performance. Unilever Nigeria released Q1 19 earnings last week that were significantly below expectations. Topline declined 21% yoy (below the consensus expectation of -3.5%) as weaker earnings from both Food and Home & Personal Care (HPC) segments persisted. We attribute the drag in earnings to: 1) sustained weakness in consumer spending against a backdrop of slower economic growth; and 2) tighter pricing competition in the HPC space given the flurry of cheaper alternatives. We believe the inability of Unilever to fully pass higher production costs on to consumers, in an attempt to maintain market share, has continued to drag earnings. Furthermore, despite the 24% yoy reduction in operating expenses, net income contracted 48% yoy, as finance income (which boosted Q1 18 numbers), came in lower in Q1 19 due to the lower interest rate environment.
Margins deteriorate. Given the poor performance, margins weakened. Gross profit and EBIT margin declined by 7.6ppts and 6.8ppts to 20% and 7% respectively in Q1 19, below the peer average of 28% and 18% respectively. Despite the margin deterioration, we do not expect Unilever to increase prices this year, given the steep competition in the industry.
Weaker earnings outlook. We cut our earnings outlook for Unilever, as we expect heightened competition – especially in the HPC space – to continue to pressure volumes growth. In addition, we expect: 1) lower consumer spending; and 2) subdued pricing power to continue to weigh on the topline. On the flipside, we do not rule out the possibility of a potential price cut across selected products during the year, to regain some market share. Furthermore, while management is yet to provide guidance on the use of the funds from the sale of the spreads business, we believe this could be channelled towards the introduction of new products into the market, especially considering the product portfolio of the parent company. Consequently, we project topline and net income to fall 5.0% (previously +6.5%) and 18.7% (previously +2%) yoy in FY 19, while we forecast EPS to settle at NGN1.29 (previously NGN1.62).
We maintain our Hold rating on Unilever, albeit with a lower TP of NGN33.45, suggesting an ETR of 11%. The stock is trading at FY 19f PE and EV/EBITDA of 25.9x and 12.2x respectively, relative to the GEM peer average of 15.6x and 15.5x.