Culled—Proshare

November 4, 2020

by FBNQuest Research

-14% Cut to Price Target; Underperform Rating Maintained 

Unilever Nigeria’s (Unilever) Q3 2020 recovery from last year’s distribution crisis and Q2’s lockdown was eroded by a material increase in overheads and borrowing costs.  

Specifically, sales surged 94% y/y and 24% q/q, but the company recorded a pretax loss of -N2.0bn. The loss was largely caused by a 68% y/y increase in opex, and a net interest expense of -N584 vs an income of N561m a year ago.  

The results also showed that sales are still well below historical average. This suggests that Unilever is yet to fully regain market share lost in Q3 2019 despite double-digit volume growth delivered in both the Food Products and Home & Personal Care businesses.  

Although the pretax loss in Q3 was lower by 50% y/y, it was 4x worse than our forecast. As such, we have doubled our 2020E pretax loss forecast to -N2.2bn whilst adjusting our 2021-22E EPS forecasts downwards by an average of -12%.  

These changes are largely on the back of upward revisions to opex as well as cuts in net interest income estimates for the periods. AS such, we have reduced our price target price by -14% to N9.6.  

Year-to-date, Unilever shares have sold off by -38%, underperforming the broad index by -52%. From current levels, our price target implies a downside potential of -30%. We therefore retain our Underperform rating on the stock.   

Topline Growth Muted by OPEX 

The main positive in the Q3 2020 results was the y/y sales growth. In addition to the opex increase, other loss of -N442m was 5x higher y/y while net interest expense of -N584m compares with a net interest income of N561m in Q3 2019. Nevertheless, the pretax loss halved y/y thanks to the topline strength.  

Sequentially, the pretax loss was 34% higher, driven by an 18% q/q increase in opex and a reversal of Q2’s net interest income to an expense. Relative to our forecasts, opex and other loss surprised negatively, by 55% and 2x respectively. As such, Q3 pretax loss was far worse than our forecast of -N496m.