§  Contraction in topline: down 6.60% q/q, 20.83% y/y

§  Lower gross profit margin: down 596bps q/q, 756bps y/y

§  Reduced opex/sales ratio:  down 865bps q/q, 162bps y/y

•   Profit Before Tax of N2.03billion in Q1 2019 against a Loss Before Tax of N30.14million in Q4 2018 and a Profit Before Tax of N3.70billion in Q1 2018

Last week, Unilever Nigeria Plc published its Q1 2019 scorecard. The published result showed significant pressure in both the Food segment and the Home and Personal Care (HPC) segment. Overall, Unilever’s Q1 2019 PBT margin declined by 469bps y/y to 10.54%, largely driven by the 756bps y/y contraction in gross margin and N200.41million impairment loss taken on trade receivables in the quarter, which outweighed the 162bps y/y reduction in opex/sales ratio and the 90.57% y/y increase in net finance income. 

Topline Performance Under Pressure 

Unilever Nigeria Plc. posted its weakest topline performance since Q3 2016. Topline contracted by 6.60% q/q and 20.83% y/y to N19.24billion. The decline in topline was due to poor performance in both its Food and HPC segment. Revenue generated from the Food segment and the HPC segment fell by 13.20% y/y and 26.83% y/y to N9.25billion and N9.98billion respectively. This is largely unlike what we observed in FY 2018 where revenue generated from the food segment grew by about 19.00% while the HPC segment was somewhat flat. Although weak consumer spending and rising competition in the consumer space may largely explain the contraction in revenue generated from both segments of Unilever’s business, with specific regards to the food business, the growing competitiveness in the seasoning space may have accounted for the poor performance of the segment.  

Similar to previous quarters, topline remained volume driven as the ability to take price increases is constrained by rising competition and weak consumer spending. However, volume growth may have come under pressure because of the factors highlighted above. This, combined with cost pressures, which 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, may have been responsible for the 27.95% q/q and 42.47% y/y decline in gross profit. This may also have accounted for the 596bps q/q and 756bps y/y contraction in gross margin. 

Significantly Improved Opex/Sales Ratio

Contrary to the past few quarters where opex/sales ratio where above the 21% levels, we saw a significant improvement in opex/sales ratio in Q1 2019 both on a y/y and q/q basis. Q1 2019 opex/sales ratio printed at 12.36%, the lowest in recent time. This was largely supported by the reduction in both administration expenses as well as marketing and distribution expenses. 

Nonetheless, operating margin fell by 60.40% y/y to N1.32billion as the pass through effect of weak gross margin combined with N200.41million impairment loss on trade receivables outweighed the improvement in opex/sales ratio and N26million of other income.

Cash balance supports strong interest income

Unilever’s finance cost remained tamed as the benefit of the right issue undertaken in 2017 continue to support bottom line performance. On a y/y basis, finance cost was relatively flat while finance income grew by 72.87% y/y to N804million; a dividend of strong cash balance. This led to a net finance income of N709.54million in Q1 2019, 90.57% higher than what was recorded in Q1 2018.  

On a quarterly basis, Unilever recorded a lower net finance income, 42.86% lower than Q4 2018. This was due to the 48.81% q/q increase in finance cost, which more than outweighed the 71.28% q/q decline in finance income. 

Negative cash flow from operations

Working capital deteriorated in Q1 2019, largely due to a spike in trade and other receivables. Trade and other receivables rose to about N21.30billion in Q1 2019 from N12.17billion in Q1 2018; raising concerns on the firm’s cash generation ability. The rise in trade and other receivables may have been driven by Unilever’s drive to grow volume amidst weak consumer spending and rising competition. 

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 approved increase in minimum wage. We expect the moderation in operating expense to be sustained as this may continue to bode well for 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. 

Source: Company financials, Investment One Research