Unilever Nigeria Plc recently released its half-year (H1) 2020 results on the Nigerian Stock Exchange with disappointing top-to-bottom line figures.
Following the disappointing results, Vetiva Research analysts have set a much lower target price of N8.21 for the stock as against N12.85 it closed earlier, while also advising investors to sell.
The analysts noted that costs, impairment losses deterred earnings momentum of Unilever Nigeria Plc, adding that a 35.9 percent year-on-year (y/y) decline in revenue to N27.3 billion is ahead of Vetiva analysts’ N26.9 billion estimate for the period.
The H1’20 results in review
The first-half results of Nigeria unit of British-Dutch multinational consumer goods company, Unilever for the period to June 30 shows its revenue decreased by 35.9 percent to N27.33billion in H1’20 as against N42.65billion in H1’19. Gross profit of N6.15billion in H1’20 represents a decrease of 45.7percent as against N11.34billion in H1’19.
Unilever reported N567million pre-tax loss in H1’20 as against pretax profit of N4.69billion in half year of 2019, representing a decrease of -112.1 percent. It also recorded after tax loss of N519million, down by -114.8percent compared to profit after tax of N3.51billion in H1’19.
Vetiva analysts comments
Whilst the y/y decline in revenue was a combination of weak performances
from both the food (35.1 percent down y/y) and HPC (45.6percent down y/y) segments,
both segments recorded mild growth of 5.9 percent and 4 percent respectively quarter-on-quarter (q/q).
The analysts further commentary…
We believe that the company’s strategy to re-introduce single cube seasoning may have contributed to the q/q growth in its food segment while an increased need for a more hygienic environment may have boosted its Home & Personal Care (HPC)
revenues.
More importantly however, the q/q growth reaffirms our position that the FMCG giant remains on a path to recovery following the change in receivables policy that led to a normalization of revenues in H2’19.
Fighting a cost battle on two fronts
Gross margin came in significantly weaker (-4.1ppts y/y) at 22.5 percent curbed
by increased cost of sales amid a pressured topline, with gross profit printing
at N6.2 billion (-46 percent y/y).
This reflects the increased cost of operations, spurred by the commencement of lockdown and social distancing protocols, first in Lagos and then across the country in Q2’20. Operating expenses were also impacted by the consequent inflationary expenses, with Selling & Distribution expenses and Admin expenses only falling by 8.1% and 3.3 percent y/y, despite a 35.9 percent drop in revenue.
On the other hand, while the inflationary pressures from the lockdown is expected to be felt by other FMCG players, Unilever continues to bear the cost of its now defunct receivables policy in the form of impairments.
Notably, the company recognized a N600 million impairment loss on receivables in Q2’20, extending total H1’20 loss on impairment to N646 billion. While the change in policy is in our opinion an upgrade, compared to the “channel stuffing” that it replaced, the expected impairments that should continue to unravel till the end of 2020 will keep operating margins depressed. Overall, Unilever reported a N1.8 billion operating loss in Q2’20, taking the H1’20 operating performance to a N1.4 billion loss position.
That said, the y/y reduction in the overall debt balance (29.9percent reduction between FY’19 and H1’20) and interest rates have provided a breather for earnings in H1’20, with net finance income falling only 0.05percent y/y to N844.2 billion. Adjusting for taxes, Unilever reported a loss before tax of N1.6 billion for the quarter bringing the total H1’20 loss to N519 million.
Earnings estimate revised, sell rating maintained
In the last earnings call held in June, management mentioned plans to explore the value segment of the Home and Personal Care market. We believe that this is a timely play, given the mix of an urgency for cleaning agents and the fast diminishing consumer disposable income. Thus, in line with the mild Q2 topline beat, we slightly revise our revenue estimate for the rest of the year, with FY’20 revenue to print at N56.5 billion. We however expect the elevated cost pressure in the value segment to keep a lid on the company’s margins.
Sell recommendation maintained
We therefore revise our earnings estimate downwards in line with the current
earnings realities and forecast a loss after tax of N400million. We value the stock at N8.21 and maintain a Sell recommendation.
Stock price falls
BusinessDay had reported that its shares will see further pressure following record N567million H1 pre-tax loss. Unilever Nigeria Plc is engaged in the manufacture and marketing of foods and food ingredients, and home and personal care products.
Unilever shares have lost about -41.6percent of year open price. Market data showed it is one of the worst performing stocks this year on the Nigerian Stock Exchange. The stock heads to its 52-week low of N9.90 having reached a 52-week high of N32.
