July 27, 2018/Cordros Report
Update: UNILEVER published H1-18 result last week, with first quarter numbers restated. For the three months ended June (Q2), revenue grew 7.5% y/y, while EBIT was down 24% y/y. PAT grew by 36% y/y, thanks to net finance income of NGN1 billion (vs. loss of NGN780 million in Q2-17).
Q2-18 revenue in line; but estimate for 2018E is revised lower: UNILEVER’s Q2-18 revenue of NGN24.65 billion is in line with our estimate for the period (0.3% variance). And at NGN48.13 billion, achieved revenue in H1-18 is 12.9% higher vs. H1-17, and tracks ahead of 2017FY’s NGN90.8 billion, both (1) when annualized and (2) considering a seasonally stronger second half. But that said, we revise 2018E revenue estimate to come in 3% lower than previously expected, given the downward revision of the Q1-18 figure (by 9%). The revised result shows that Food revenue was actually lower by 6% y/y in Q1-18 (previously +16% y/y) while HPC growth was unchanged. In Q2, Food revenue grew 19% y/y while HPC was lower by 2%.
Gross margin estimate revised higher, on strong H1 formation: Over H1-18, gross margin came in at 31.8%, +70 bps vs. H1-17. In addition to the upward revision of Q1-18 gross margin (+51 bps) under the restated result, the margin of 35.3% achieved in Q2-18 was higher 213 bps y/y and beat our 31% estimate. This is consistent with our strong view on margin for 2018E, confirmed by the decision to retain our prior estimate of 32% for the year even during the sharp q/q contraction in Q1 (before restatement). Following the latest result, we revise 2018E gross margin estimate slightly higher to 32%, while reiterating key supporting factors as stable FX and selling prices, and importantly, management focus on cost containment leveraging local sourcing of inputs.
Opex pressure; lower net finance cost to the save: Opex grew at a surprise 49.4% y/y in Q2-18, and despite revising the Q1 figure lower (by 12%), growth in H1-18 stood at 26.8%. This particularly exerted pressure on EBIT, which grew by a marginal c.2% y/y in the six months period. We expect slightly lower opex in H2 – in line with historical trend – overall, equating to 13.8% growth (fastest since 2013) over 2018E.
Net finance cost of NGN1.3 billion was reported in H1-18. Asides from finance charges dropping significantly (-90% in H1-18) following the reduction of borrowings to record-low levels (NGN4.3 million in H2, lowest since the NGN4.5 million balance in 2012FY), finance income was equally strong (+300% in H1-18), benefiting from cash formation following the rights issue concluded in H2 last year. On balance, while EBIT is forecast to grow by c8% in 2018E, we forecast EPS to grow at a faster rate of c.50%.
Valuation: Our model produced a TP of NGN38.44 (previously NGN32.78) for UNILEVER, even as we cut risk-free rate to 13.6% (from 14.1%). Compared to the current market price of NGN52.55, our revised TP implies potential downside of 26.9%. Maintain SELL. The stock is trading at forward (2018E) P/E and EV/EBITDA multiples of 27.1x and 14.3x respectively, ahead of Bloomberg’s Middle East Africa peer median multiples of 18.7x and 13.1x respectively.
Risks: This includes (1) price cuts and (2) FX pressure- albeit much lower.
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