August 6, 2020/InvestmentOne Report

·        Uninspiring  topline performance: up 5.1% q/q, down 40.2% y/y

·        Falling gross profit margin: down to 19.5% from 25.7% and 31.9% on a q/q and y/y basis respectively.

·        Surge in Opex/sales ratio to 28.7%: up from 22.1% and 21.0% on a q/q and y/y basis respectively

·        Loss Before Tax of N1.5billion, against PBT of N950million in Q1 2020 and N2.7billion in Q2 2019. 

The recently released Q2 2020 Unilever Nigeria scorecard largely reflected the effects of the coronavirus. Topline printed poorly (-40.2% y/y), driven by a plunge in both Food and Home and Personal Care segments. Net profit margin slid to -11.7% in the quarter under review following a weakening gross profit margin, higher opex/sales and a higher impairment on trade receivables, which offset a higher net finance income position.  

Gross Profit Showing Pressures

Year-on-year topline performance followed the trend witnessed since Q3 2019, when the company implemented stricter credit terms in order to focus on cash collection. As such, Food (-35.1%) and Home and Personal Care (-45.6%) segments declined y/y. We however highlight that goods in transit jumped significantly during the quarter (from N84.0million in Q2 2019 to N1.0billion in Q2 2020), which may not be unconnected with lockdown measures in place during the period under review. Gross profit margin fell during the quarter, to 19.48%, from 31.92% in Q2 2019 on the back of heightened food inflation and devaluation effects (NGN depreciated by about 10% during the quarter). This likely. 

Bottom line performance Ravaged by Lackluster Gross margin

Moving down the P&L, the company recorded a Loss Before Tax of N1.5billion, after briefly returning to profitability in Q1 2020. This was largely driven by lackluster gross profit performance, which was eclipsed by operating expenses. Although opex declined by 18.3% y/y following a 43.4% y/y dip in brand and marketing expenses, this was not enough to flatter the quarter’s weak earnings even as it recorded some improvement in its net finance income position. Finance income was mostly driven by a significant rise in FX gains and an unwinding of lease liability.  

We highlight that the company posted a N597milliion impairment loss on trade receivables (compared to N17million in Q2 2019) which may not be unconnected with its strategy to tighten its credit terms and improve cash flows.  

H1 2020 Trailing on Strict Credit Terms

Taking a half year viewpoint, the company’s net income is trailing significantly compared to last year (Loss before tax of 519million in H1 2020 compared to Profit before tax of N3.5billion in H1 2019). Performance has largely been reflective of management’s decision to tighten credit terms, which has impacted revenues adversely. With that said, we highlight the improvement in cash flow from operations y/y, particularly in relation to trade receivables. CFO turned positive to N9.3billion in H1 2020 compared to a negative N11.8billion in H1 2019. Also, q/q sales growth has been quite stable since the change in strategy in Q3 2019. Bottom line was impacted by a 45.7% fall in gross profit, to more than offset the 4.6% drop in operating expense. 

Outlook

Going forward, we expect the company’s margins to remain pressured following COVID-19 challenges, FX illiquidity and naira devaluation, even 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 FMCG space, weak consumer spending, increased cost pressures and the need for aggressive marketing to claw back some market share. This may further limit the company’s ability to undertake price increases in line with economic realities. With that said, we are excited about the progress seen in CFO generation so far this year. 

Source: Company’s Financials, Investment One Research