January 31, 2020/InvestmentOne Report

·         Dismal  topline performance: up 1.79% q/q, down 55.66% y/y

·         Negative gross profit margin: down to -32.44% from -19.09% and 26.07% on a q/q and y/y basis respectively.

·         Surge in Opex/sales ratio at 68.45%: up from 31.39% and 21.01% on a q/q and y/y basis respectively

·         Loss before tax of N8.9billion in Q4 2019 against losses of N4billion in in Q3 2019 and N30million in Q4 2018.

Last week, Unilever Nigeria Plc published its Q4 2019 unaudited scorecard. The result showed a heavy decline in turnover y/y, particularly reflected in the company’s  Home and Personal Care (HPC) segment, which recorded a 62.0% drop in revenue. Similarly the Food segment saw revenue plunge by 49.4% y/y in the quarter. Cumulatively, revenue was down by 55.7% y/y to N9.1billion. Overall, Unilever’s Q4 2019 PBT margin worsened by 9775bps y/y owing to weak performance in most income and cost lines; GPM crunched by 58pps y/y; opex/sales surged by 47pps; and net finance income fell by 49.5% y/y in the quarter under review. 

Following stricter credit terms (as reported by management in response to Q3 2019 result) in order to focus on cash collection, the company recorded uninspiring topline performance in both major segments. This dragged down gross profit margin to negative territory (-32.44%) as cost of sales outweighed turnover leading to a gross loss of about N3billion, 155% lower y/y. Moving down the P&L line, total opex rose materially, largely driven by overhead expenses. This contributed to a significant jump in opex/sales for the quarter, up to 68.5% from 21.0% in Q4 2018. Overall, PBT margin printed at -97.9%, a large deterioration from the final quarter of 2018 on the back of the aforementioned factors coupled with a 49% decline in net finance income. 

Looking at FY 2019 numbers, the loss before tax recorded in the final half of the year proved enough to turn the yearly scorecard sour; FY 2019 loss before tax printed at N8.3billion. This compared poorly with 2018 numbers following a generally weak performance, particularly accentuated in turnover (-34.6% y/y) following management’s decision to restrict credit sales. As such, we witnessed a sharp surge in impairment on receivables from the preceding year to N1.2billion and a corresponding dip in trade receivables. We believe this is evident of the new direction taken on by management and foresee even further write downs in the coming quarters. Bottom-line performance was further exacerbated by a material deterioration in gross profit margin performance (11.0% in 2019 vs 30.4% in 2018), a 654bps increase in opex/sales ratio and a slight dip in net finance income y/y.   

Going forward, we expect the company’s profitability margins to remain pressured as it continues to restrain credit sales and incur impairment losses. This, we believe, would be further pressured by uninspiring earnings outlook attributed to intense competition in the FCMG space; weak consumer spending; increased cost pressures; and the need for aggressive marketing expenses in a bid to claw back some market share. However, some positivity may be reaped from the recent minimum wage increase, implementation of the 2020 budget and lower interest rate environment. 

We highlight that the company released unaudited results and we await management clarification regarding the N4.2billion tax credit and dividend announcement.