Culled—Proshare

November 12, 2019

By  FBNQuest Research

Significant cuts to 2019-21E EPS forecasts  

Unilever Nigeria’s (Unilever) Q3 2019 results marks its weakest performance for as far back as we can track. The company posted a record pre-tax loss of -N4.1bn for the quarter, driven by a -63% y/y decline in sales. According to management, the company tightened credit terms to key distributors to minimize non-performing receivables which had been building up over the past quarters. Consequently, the food and home and personal care businesses lost sizeable market share, and were down -56% y/y and -70% y/y respectively.

Although we were unable to obtain adequate information from management on future plans, we understand from channel checks that the company has engaged a mega-distributor to whom it will exclusively supply its products. Although this potentially mitigates counterparty risk, it will likely result in further price discounting of Unilever brands – to allow for additional distributor margins – at the expense of profitability. Taking these into account, we expect Q4 results to be an improvement over Q3, but have made material cuts to our sales forecasts.

We therefore model an average EPS cut of -66% for 2019-21E. These changes translate to a -39% price target cut to N15.9. Year-to-date, Unilever shares are down -47%, underperforming the broad index’s loss of -16%. The shares are trading on a 2020 P/E multiple of 20.4x for a 2021E EPS growth of 3% y/y. From current levels, our price target implies a downside potential of -19%. Given our weaker earnings outlook along with the downside potential, we downgrade our rating on Unilever to Underperform.

Q3 loss caused by y/y sales decline  

Q3 2019 gross margin contracted by -5,024bps y/y to 19.1% as a result of the -63% y/y sales decline. Opex halved y/y to -N2.8bn, but this was not strong enough to offset the topline deterioration. Q3 pre-tax loss of -N4.1bn compares with N5.1bn recorded in Q3 2018. Sequentially, sales declined by -62% q/q while gross margin contracted by -5,100bps q/q. Q3 pre-tax loss compares with Q2 PBT of N2.7bn. Relative to our forecasts, Sales missed by -63%, gross margin was 5,208bps narrower than forecast while PBT was significantly behind our forecast of N3.2bn.