October 25, 2023/United Capital Research
Unilever Nigeria Plc maintained strong turnover in nine months (9M) of 2023 (up by 26.0% y/y, from N64.8bn in 9M-2022 to N81.6bn), despite the challenging macro-economic environment that was underpinned by lower purchasing power of consumers. This is because of the unique segmentation of the company’s business into Food Products (FP), and Home & Personal Care Products (HPC), which fall into the category of “necessity products”. The company’s “FP” business segment accounted for 52.9% (N43.2bn) of its total revenue generated in 9M-2023, while its “HPC” business segment accounted for 48.1% (N38.4bn) of total revenue generated. The challenges in the macro environment were however reflective in the company’s total cost of sales (up by 30.7%, from N47.6bn in 9M-2022 to N62.2bn) and recorded impairment loss (N1.7bn) on trade receivables (compared to write back of N54.1mn in 9M-2022).
v Financial Fortitude: Thriving Through Strategic Treasury Management
Unilever Nigeria Plc showcased an adept at navigating the prevailing economic challenges and policy shifts. In terms of treasury management, there was a strategic utilisation of bank accounts, focusing on interest income generation and intelligent management of exchange rate variances (particularly in the aftermath of the unification of exchange rates). Unilever Nigeria Plc’s interest on call deposit and bank accounts recorded a sustained improvement in 9M-2023, climbing by 208.0% y/y to record at N2.7bn in 9M-2023 from N886.9mn in 9M-2022. Interestingly, this sustained improvement was underpinned by the elevated interest rate environment for the most part of H1-2023. Also, the company recorded gains from exchange rate difference on bank accounts to the tune of N2.9bn in 9M-2023 from a loss position of (N479.1mn) in 9M-2022. This essentially offset the company’s interest expense incurred on third party bank loans (N2.4bn) during the period under review.
v Resilient Profits: Navigating Higher Taxes in Turbulent Economic Waters
Unilever Nigeria Plc showed resilience in its bottom-line (Profit-After-Tax), which improved from a loss position of (N348.0mn) in 9M-2022, to record a profit of N1.7bn in 9M-2023. The improvement comes despite the 294.3% y/y climb in the income tax recorded for the period under review (from N821.1mn in 9M-2022 to N3.2bn). Noteworthy is the fact that, the company’s Profit-before-Tax (PBT) recorded at N4.9bn in 9M-2023 (up by 937.4% y/y from N473.1mn in 9M-2022).
Other Information
v Scheduled Exit from the Homecare and Skin Cleansing Markets
Over the past seven (7) quarters, the revenue generated from the “HPC” business has only grown by a Compound Annual Growth Rate (CAGR) of 1.4%, while revenue generated from the “FP” business has grown by a CAGR of 7.0%. This implies that the profitability of the company’s HPC business in Nigeria has been subpar and below expectations. Noteworthy is the fact that, the volatility of the Naira stands a major downside to the company’s HPC business, as most of the required raw materials are imported from different parts of the world. Some of these raw materials include humectants, preservatives (like parabens and phenoxyethanol), antioxidants and most active ingredients (like retinol, hyaluronic acid, salicylic acid). In March-2023, Unilever Nigeria Plc in a corporate notice to the Nigerian Exchange Limited revealed its proposed exit from Nigeria’s home care and skin cleansing markets (by the end of the fiscal year 2023). The company further revealed that by altering its business strategy, it would be able to expand more quickly and better serve the interests of customers, shareholders, and staff. The company also stated that it anticipated that its withdrawal from these two categories will lead to an overall increase in profitability, business growth, and sustainability.
Outlook and Investment Recommendation (BUY: Target Price N20.00)
Given the culmination of the prevailing macroeconomic challenges and foreign exchange volatility, the consumer goods sector is expected to remain a direct recipient of the negative impacts. Consumer spending will remain subpar. However, given the nature of products (“necessity products”) sold by the company, Unilever Nigeria Plc is expected to maintain current level of turnover rate. Also, the initiative to exit the Home Care and Skin Cleansing Markets will create significant avenue for the company to explore other more profitable ventures and reduces its exposure to exchange rate volatility.
Given the fact that UNILVER is considered a growth stock, holding a stake in the company with a medium-term investment outlook (6 months) will be choice, given its future potentials and ability to outperform overall sector performance.
