Culled—Proshare

3/5/2019/FBNQuest Research 

Material cuts to 2019-21E EPS forecasts

Unilever Nigeria’s (Unilever) Q1 2019 results were disappointing. PBT was down -45% y/y and missed our forecast by -51%. As such, we have made marked cuts to our 2019-21E earnings forecasts. Unilever’s results were primarily driven by weaker sales in its core businesses. Sales in the home & personal care (HPC) and food products segment declined by 27% y/y and 13% y/y respectively. 

While it is clear from the past year’s quarterly trends that Unilever has struggled to retain market share in HPC, the y/y decline in food products sales was unexpected. Our recent channel checks suggest that the company’s seasonings business – which accounts for the single largest portion of sales – has come under pressure, following product launches from NASCON (Dan-Q Cubes) and GB Foods (Gino Cubes) late last year. The competitor brands are also priced more competitively than Unilever’s Knorr and Royco seasoning cubes. 

Taking these into account, we have cut our average EPS forecasts for 2019-21E by -16%, largely on the back of a decrease in food product sales over the forecast years. We have however reduced our 2019E opex forecast by -13% following a positive surprise of -44%. 

Nonetheless, this adjustment is not strong enough to drive bottom line forecast improvements. Our forecast changes translate to a -14% price target cut to N26.7. Year-to-date, Unilever shares have lost -16%, underperforming the broad index which is down -7%. The shares are trading on a 2019 P/E multiple of 18.8x for a 2019-21E average EPS growth of 10%. From current levels, our price target implies a downside potential of -14%. We retain our Neutral rating on the stock.

Weak sales drive -45% y/y PBT decline

Q1 2019 sales declined by -21% y/y to N19bn. Consequently, gross margin contracted by -756bps to 20.1% while PBT declined by -45% y/y to N2.0bn. Opex and net interest income both improved by -30% and 91% to –N2.4bn and N710m respectively. 

However, these positives were eroded by the weakness in topline. Sequentially, sales were down -7% q/q whereas PBT showed considerable improvement from Q4’s pre-tax loss of –N30m. Relative to our forecasts, all key line items underperformed, with the exception of a -44% positive surprise in opex. PBT and PAT missed our Q1 forecasts of N4.2 and N3.0bn by -51% and -49% respectively.