April 3, 2019/InvestmentOne Report

·         Mixed topline growth: down 14.8% q/q, up 3.5% y/y.

·         Lower gross profit margin: down 508bps q/q, 865bps y/y.

·         Non-directional opex/sales ratio: down 178bps q/q, up 392bps y/y.

·         Loss Before Tax of N30.14million against a Profit Before Tax of N5.11billion and N4.08billion in Q3 2018 and Q4 2017 respectively. 

Unilever Nigeria Plc, late last week, published its weakest quarterly topline growth since Q4 2017. Overall, bottomline performance was weighed down by weak margin, higher opex/sales ratio and other losses, which saw the firm record a loss before tax in Q4 2018; the first quarterly loss in recent time. In summary, Unilever posted a loss before tax of N30.14million in Q4 2018, largely driven by the 22.2% y/y decline in gross profit, 27.3% y/y increase in operating expenses as well as the N2.0billion of other losses recorded in the quarter. 

Topline Growth Remained Uninspiring 

We observed Unilever Nigeria Plc y/y quarterly topline growth has been declining since the start of the year. The reduction in topline growth may be largely attributed to increased competitiveness in the consumer space as well as weak consumer spending. With regards to Q4 2018, the moderate uptick in Unilever’s topline was solely driven by 17.0% y/y growth in revenue generated from its food business as it posted a 7.2% y/y contraction in revenue generated from its Home and Personal Care (HPC) segment. This is in consonant with management’s disclosure in its last conference call that the HPC segment has been under pressure in recent times. 

Furthermore, gross profit dropped by 22.2% y/y to N5.37billion in Q4 2018. The decline in gross profit was due to slower growth in topline and input cost pressures. We believe the input cost pressure may have emanated from the rising prices of raw materials as well as higher carriage cost associated with the challenges faced in the Apapa port. This led to a reduction in gross margin by 865bps y/y to 26.1% in Q4 2018.  

On a sequential basis, topline contracted by 14.8%. This coupled with slower decline in cost of sales relative to the reduction in topline adversely impacted on gross profit. Consequently, gross profit was down by 28.7% q/q. 

Opex/Sales Ratio Remains High 

On a y/y basis, opex/sales ratio increased by 392bps to 21.0% in Q4 2018. The rise in opex/sales ratio was driven by the surge in both the administration expenses and the marketing and distribution expenses. The administration expenses increased by 25.6% y/y to N3.22billion while the marketing and distribution expenses also grew by 32.3% y/y to N1.10billion. However, on a q/q basis, opex/sales ratio declined by 178bps, supported by the 28.0% q/q reduction in administration expenses despite the 6.1% q/q rise in marketing and distribution expenses.    

As a result of the spike in y/y operating expenses in Q4 2018 and the decline in gross profit, combined with a N2.00bilion of other losses recorded in the quarter, Unilever posted an operating loss of about N1.27bilion; the first in recent times.  

Cash balance supports strong interest income 

Unilever cash balance remained strengthened as it continues to see support from the right issue undertaken in 2017. Given that its cash and bank balances grew by 13.2% y/y to N57.14billion in Q4 2018, we believe this may have supported the 61.6% y/y increase in the finance income recorded in the quarter. Furthermore, we believe the deleveraging exercise may have also contributed to 99.4% y/y decline in total loan outstanding to N4.18million in Q4 2018. The decline in finance cost and the increase in finance income led to a 111.7% y/y spike in net finance income to N1.24billion in Q4 2018. As a result, debt-to-equity ratio remained low at 0.01% as at the end of Q4 2018 from 0.89% in Q4 2017.        

On a quarterly basis, Unilever recorded a higher net finance income, 46.8% higher than Q3 2018. This was due to the 65.2% q/q increase in finance income which more than outweighed the 213.9% rise in finance cost.  

Negative cash flow from operations 

Unilever’s overall cash balance came in better on a y/y basis as we saw improvement in its ability to generate cash from its operations. We highlight that the FY2018 net cash flow generated from operation came in positive, largely supported by a reduction in its trade and other receivables and a rise in trade and other payables which was sufficient enough to neutralize the negative impact of a slight increase in its inventory position. 

Going forward, topline growth may continue to be moderated by intense competition in the consumer space. However, we expect topline performance in the near term to see support from modest recovery in the economy as well as the implementation of the potential increase in minimum wage. While the rise in operating expense has been negative for performance, we expect management to curb future increases to support bottom line performance. This said, our downside risk remains poor implementation of the 2018 budget, delayed passage of the 2019 budget as well as an unanticipated disruption in the FX space. 

Our pricing model is under review. 

Source: Company financials, Investment One Research