November 8, 2016/Cordros Research

Despite significant revenue and EBIT growth in Q3, UNILEVER recorded y/y and q/q PBT contractions, and would have posted a loss after tax, save for a tax credit (N449.8 million). The company’s production costs have risen quite significantly over the last two quarters, denying earnings the benefits from price increases (PIs). Notwithstanding, we look for 2016F PAT growth of 32% (previously 46%), driven specifically by (1) the continued impact of a strong first quarter performance (76% PAT growth) and (2) the tax credit booked in the third quarter.

Having said that, we believe it will take a while for UNILEVER’s PAT to recover to the 2009-2013 level (of N4 billion and more). We forecast PAT to contract by 37.4% to N987 million in 2017 (vs. 5% growth initially forecasted) — on (1) significant drop in revenue growth; (2) elevated production cost base; (3) tax charges, compared to expected credit in 2016; and (4) high interest expenses on increased debt balance — before rising to N2.6 billion and N2.9 billion in 2018 and 2019.

On the positive, we note that sales, even amidst tough business environment, will remain supported by measures such as continued innovation (e.g improved packaging), local campaigns, brand extension, and the resilience of the Food division. Rather than PIs, we think revenue (via volume) will be buoyed by these measures, in addition to favourable brand mix (emphasizing expected recovery in the Personal Care division).

The stock has accumulated 12% gain YtD, but gained 44% in Q3, which we find unfounded. Despite weak earnings recovery prospect, UNILEVER is currently the most overvalued (-68.8% implied return) among our universe of consumer companies, with the stock trading on a forward PE of 69x, at 38% premium to Bloomberg’s SSA, MEA and Nigerian peers. SELL.

Click here to read full report