Culled—Proshare

July 24, 2020

By FBNQuest Research

Marked reductions to earnings forecast

Unilever Nigeria’s (Unilever) Q2 2020 pretax loss of -N1.5bn was well below our PBT forecast of N115bn largely due to 35% and 6.5x negative surprises in opex and other operating losses respectively. In absolute terms, the results are reflective of weaker demand from the core businesses and stronger fx headwinds brought about by the pandemic. Sales plummeted -40% y/y while gross margin contracted by -1,244bps. Over the coming quarters, we see pressure on topline growth being eased by favourable base effects (from last year’s Q3 distribution crisis that led to historical losses) and price increases implemented early this year across some of the premium brands.

That said, we expect sustained fx pressure to lead to another pretax loss in Q3, followed by a marginal growth in Q4. For our forecast years, we already modelled the foregoing challenges in previous quarters. In addition, topline for H1 was broadly in line with our forecast. As such, our new forecasts changes are below the gross profit line. We now forecast that Unilever will record a pretax loss of -N1.0bn in 2020E compared with our previous PBT forecast of N1.3bn. Our 2021-22E EPS forecasts are also lower by an average of -22%.

These changes are largely driven by upward adjustments to our opex and other operating loss forecasts. Our new target price of N11.2 is lower by a relatively modest -11% because we rolled over our valuation into 2021. Year-to-date, Unilever shares have sold off by -42%, underperforming the broad index by -33%. From current levels, our price target implies a downside potential of -13%. We retain our Underperform rating on the stock.

Q2 loss driven by weaker topline

The positives in Q2 2020 numbers were an -18% y/y decline in opex to N4.0bn and a 2.6x y/y increase in net interest income to N349m. These were however not strong enough to offset the y/y declines in sales and gross margin.

Consequently, Unilever recorded a pretax loss of -N1.5bn. On a sequential basis, sales increased by 5% q/q but gross margin contracted by -623bps q/q. Opex was up 37% q/q whereas net interest income declined by -30%. Q1 PBT of N948m therefore compares with the Q2 pretax loss. Relative to our forecasts, gross margin and opex missed by -152bps and 35% respectively, driving the negative surprise on the bottom line.