Recently, Unilever Nigeria Plc (“UNILEVER” or “the company”) published its Unaudited H1-2021 financial result. According to the report, Revenue grew strongly in H1-2021, up by 43.2% y/y to N39.2bn from N27.3bn in H1-2020.  Similarly, Q2-2021 Revenue performance grew 40.8% y/y indicating revenue resilience. However, the company continues to face noticeable cost pressures which exerts sustained pressure on profitability. Nevertheless, the company turned a corner on profitability after posting a Net income of N0.7bn in H1-2021, from a loss of N0.5bn in H1-2020.

Revenue resurgence continues: According to the recently released financials, UNILEVER’s recent Revenue resurgence continued in Q2-2021 following the 40.8% y/y growth in Revenue to N19.7bn, culminating in a 43.2% y/y growth in H1-2021 revenue, printing at N39.2bn. Across business segments, H1-2021 Revenue growth was supported by rapid growth in both Home & Personal Care (+50.6% y/y) and Food (+37.4% y/y) businesses. Examining key drivers of revenue, management announced it implemented price increases across some of its product portfolios following a similar move by competitors as well as surging costs. In addition, volume growth recovered following improved investment behind the company’s brands as well as increased volumes in the tier-4 segment (mass market) of the consumer market following recovering consumer income.

Cost pressures yet to subside: A combination of FX pressures as well as surge in commodity costs continue to weigh on UNILEVER’s cost growth. Key raw materials like Linear Alkyl Benzene (whose price is tied to movement in crude prices), and Palm Oil continue to record a surge in price. In addition, freight costs ticked higher during the period in the face of prolonged pressures at the Apapa port. All in, Cost of Sales rose 38.2% y/y to N29.3bn in H1-2021, from N21.2bn in H1-2020. Nevertheless, Gross margin expanded by 270bps y/y to 25.2% due to slower growth in Cost of Sales relative to Revenue. Similarly, Gross profit grew 60.4% y/y to N9.9bn in H1-2021. The strong Gross profit growth and margin expansion reflects stronger pricing power for the company.

Opex surge as company ramps up brand investment: In H1-2021, management confirmed it has been investing aggressively behind company’s brands which has resulted in the sharp increase in Marketing & Distribution expenses (up 36.4% y/y to N7.8bn in H1-2021) and consequently Operating expenses (up 36.0% y/y to N9.5bn). Despite the increase in Operating expenses, UNILEVER recorded Operating Profit of N422.4m in H1-2021 compared to an Operating loss of N1.4bn in H1-2020.

Slow and steady return to profitability: UNILEVER recorded Pre-tax profit of N1.0bn in H1-2021, compared to a Pre-tax loss of N0.6bn in H1-2020. The return to profitability was further supported by Finance income of N0.7bn, lower than H1-2020’s N0.8bn by 23.4% y/y, despite strong Cash generation during the period with Cash & Cash Equivalents growing by 19.1% YTD and improved interest rate environment during the period. Overall, Net income printed at N0.7bn for the period, a turnaround from the N0.5bn Loss recorded in H1-2020.

Outlook & Valuation: Looking ahead, we expect the company’s revenue to continue its upward trajectory. Our expectation is premised on the company’s recent price increases on several of its products, which we believe would support price-driven growth. Our viewpoint is further bolstered by the fact that price increments in the FMCG space have been industry-wide and thus we do not expect a dramatic fall in UNILEVER’s volumes. That said, we note competition among brands in the FMCG space (particularly among players in Home and Personal Care segment) remains tough. Overall, we retain our Revenue forecast for the year, with a growth projection of 24.5% y/y to N77.1bn (Annualised H1-2021 Revenue – N78.3bn).

Nevertheless, we anticipate that UNILEVER will continue to face cost pressures. Although, FX pressures are expected to simmer in the coming months, price of key commodities remain biased upwards, consequently expected to keep raw material costs elevated. However, we note that the company’s price increases across its product portfolios has enabled UNILEVER pass through its cost pressures adequately to the consumers. Thus, we anticipate the company’s margins will remain strong in H2-2021. Consequently, we model higher Gross margin of 25.0% compared to 22.0% previously.  Overall, we project Net income to print at N1.5bn (up from our prior forecast of N0.9bn due to better-than-expected operating performance) in FY-2021 compared to a Loss of N4.0bn in FY-2020. 

Following adjustments made to our forecasts as well as making favourable adjustments to our Cost of equity to reflect moderating yield environment as well improved macroeconomic fortunes, we raise our target price to N15.97/s which implies an 18.3% upside to current price of N13.50/s. In light of this, we have changed our recommendation from a SELL to a HOLD.