August 28, 2020/Cordros Report

2019 was UNILEVER’s “Toughest Year Yet” as the group recorded its largest loss in thirteen years as a result of slowing market conditions, liquidity issues, and management’s decision to reset tighten credit terms to distributors. COVID-19 and an increasingly weaker macro environment have killed the chances of any meaningful recovery and it will be tough for the company to avoid a second consecutive loss in 2020FY. Consequently, we slash our estimates for 2020E. Unilever Plc, the parent company, has also decided to spin-off its tea business. In this report, we provide our views on the divestment and the impact on its Nigerian subsidiary. We have a SELL recommendation on the stock with a target price of NGN10.10/s, which implies a potential total downside of 32.7%.

Weak H1 in Line with Expectations:  UNILEVER reported revenue declines of 40.2% in Q2-20 and 35.9% in H1-20 due to the high base from last year following management’s decision to reset trade inventory levels and tighten credit terms to distributors. Sequentially, revenue grew by a modest 5.1% q/q, despite COVID-19 disruptions. The Food (+6.0% q/q) and HPC (+4.0% q/q) segments both recorded modest growth, with demand for essential food and hygiene-related brands, which tend to be non-cyclical, remaining resilient in the period. Additionally, average prices were c.2% higher in the quarter.
 
H2 An Improvement from LY but Negative Earnings Expected: According to UNILEVER Plc, the West African business of which Nigeria is the flagship is still not in good shape. Management expects to see year-on-year growth in the second half of 2020 but this is mostly due to the “dreadful comparable from last year.  We agree with this view. With the easing of the lockdown progresses and as the reopening of on-trade channels commences, we believe demand for UNILEVER’s brands will receive a boost in H2-20. We have modelled 69.8% y/y growth in H2-20 revenue. This translates to a y/y revenue decline of 4.7% in 2020FY.

Divestment of Tea Business a Negative: Unilever plc announced the separation of its global tea business and as such, it seems the strategy is to shrink to grow. We see this as a negative for the stock as it reduces the stronger food portfolio to just two seasoning brands and removes exposure to a fast-growing market. In this report, we value the business at NGN4.73 billion (1.1x EV/Revenue).