Culled—Proshare

March 30, 2017/FBNQuest Research

Increase to earnings estimates and price target
Unilever Nigeria’s Q4 2016 results were better than we expected due to positive surprises on the sales and operating expenses lines. As such, we have increased our earnings estimates for the 2017-18E period significantly.

On the back of our earnings upgrade, we have revised our price target upwards by 29% to N26.3. Although the shares have declined -8.6% ytd (NSEASI: -6.0%), we still find them expensive: we see a downside potential of -17.8% to our price target.

The shares are trading on a 2017E P/E of 36.3x for flattish y/y EPS growth in 2018E. As such, we have retained our Underperform rating on the stock.

Q4 PBT and PAT up 65% y/y and 43% y/y respectively
Q4 2016 results showed positives on major key P&L items. Sales of N19.9bn grew by 21% y/y while PBT and PAT of N2.6bn and N1.5bn respectively advanced by much wider margins.

Although gross margins contracted by -932bps y/y, this was more than offset by the strong y/y sales growth and declines of -23% y/y and –86% y/y in operating expenses and net finance costs respectively, leading to the strong bottom-line. A tax rate of 42% was 900bps higher y/y and weighed on PAT.

Sequentially, sales were up 13% q/q while PBT and PAT advanced significantly q/q. The drivers of the strong q/q growth in earnings were sales growth, a 340bp q/q expansion in gross margins and declines of -11% q/q and -90% q/q in operating expenses and net finance costs respectively.

Outlook
Following a series of poor results in Q2 and Q3 2016, Unilever showed some recovery in Q4 2016 as PBT hit the N2bn mark – the first time since 2013. The better-than-expected results were mainly due to strong y/y sales growth. Sourcing of fx for raw material importation has posed a challenge for consumer goods names.

The implied effect is weaker competition from smaller competitors, thus giving the likes of Unilever the opportunity to grow their topline and gain market share. We expect the company to continue to enjoy this benefit in the near term, as we have reflected in our forecasts. The company has in the past indicated plans to source 90% of its raw materials locally by 2020.

Although gross margins expanded on a sequential basis, we would need to see this positive trend sustained before we reflect it in our model. For 2017E, we see sales and PBT growing by 14% y/y and 9% y/y respectively.