October 29, 2018/Cordros Report
Update: Following the 9M-18 result published last week, we have cut our estimates for UNILEVER’s 2019-2020E EPS by 3% and revise TP lower to NGN39.14/s (previously NGN40.94/s). Stripping out the one-off gain of NGN2.24 billion from the disposal of the Spreads business, we estimate that Q3-18 EPS, though higher relative to last year, is the lowest in one year. Revenue in the seasonally strong quarter was some way lower than both we and the market expected and OPEX was higher. We maintain HOLD recommendation at our new TP, with expected total return of -4.2%. Based on our estimates, the stock is trading on 2019E P/E and EV/EBITDA multiples of 21.1x and 10.2x respectively, at premium to Middle Eastern peer multiples of 16.1x and 11.2x respectively – although we note the significant discount to Asian peers (29.5x and 20.6x respectively.
Slight cut to revenue estimate: At NGN24.2 billion, revenue in Q3 was below our estimate by 5% and by 2% vs. Q2-18 (the first q/q decline since Q3-14). Management had said during the H1-18 earnings call that tight banking sector liquidity was impacting consumer purchasing power, and guided to a challenging short-term operating environment. The increase in credit to customers, which management said has become a common practice among competition, continued, with net trade receivables reaching NGN23 billion in 9M-18, from NGN17 billion in H1-18. We have consequently cut our revenue estimate for 2018E by 2% to NGN97.7 billion, equating to c.8% growth vs. 2017FY (previously 10%). Compared to Q2-18, volume was lower across all business segments, but a faster rate at the HPC segment compared to Food.
Higher-than-expected Q3-18 margin. Estimate unchanged: The Q3-18 gross margin of 31% was higher than the 29% we expected. YtD, gross margin is currently 31.6%, in line with our 32% estimate for the year, hence, we make no change on this line. We expect gross margin will be flat over 2019-2020E amidst rising inflation and weak demand. We were informed by distributors in Lagos that the company is soft on prices (e.g. for Close-Up toothpaste and OMO detergent) and big on promotions (e.g. for Knoor seasoning and Sunlight detergent), in response to low demand.
Another surprise OPEX increase: Opex increased 17% y/y during the third quarter, marking the second double digit increase on this line. Compared to our estimate, the amount reported was higher by 13%. Over 9M-18, overheads and service fees have increased at faster rates of 21% and 175% respectively vs. 9M-17. Brand & marketing spend has only increased by 6%. For 2018E, we now forecast opex to grow by 16% (previously c.14%), although the impact on EBIT is offset by the one-off gain of NGN2.2 billion accruing from the disposal of the Spreads business and all the assets attached to the business.
Robust EPS growth in 2018E to be followed by a decline in 2019E: Significantly lower finance charges (we estimate -89% vs. 2017FY) and off gain from discontinuing the Spreads business will largely underpin the 67% EPS growth we forecast for UNILEVER in 2018E. In 2019E, while we forecast EBIT will grow by 2%, we expect EPS will be lower by 6% vs. 2018E, adjusting for the aforementioned items.
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