April 23, 2024/Cordros Report
This report provides our updated view of Unilever Nigeria Plc (UNILEVER) for 2024E. While UNILEVER reported strong topline growth (+57.8% y/y) in Q1-24, elevated cost pressures and higher operating expenses derailed gains from improved revenue, leading to significant contractions in gross (-571bps to 41.8%) and operating (-10.86ppts y/y to 11.9%) margins. Looking ahead, we expect the company’s revenue to continue its upward trajectory on a favourable price/volume mix. Nevertheless, we highlight the risk of margin contraction due to heightened costs stemming from inflationary pressures and currency risks exposure. On a positive note, the company’s financial health appears robust, evident in its strong balance sheet characterised by its ample cash, well-capitalised reserves, and minimal debt exposure. We increase our target price to NGN21.31/s (previously NGN16.88/s) and upgrade our recommendation to “BUY’’ (previously: “HOLD”). This adjustment reflects our optimism for a positive outcome in 2024E, supported by strong revenue performance and significant cash reserves, which offer a cushion to earnings. Our estimated DPS for 2024E is NGN1.29, translating to a dividend yield of 9.0% based on the current price. Based on our estimates, UNILEVER trades at a 2024E P/E and EV/EBITDA multiples of 5.7x and 1.6x, respectively.
Further earnings improvement anticipated in 2024E: For 2024E, we expect sustained revenue growth driven by (i) pricing and (ii) volume growth on its core categories – Nutrition and Oral Care – supported by increased investments in its distribution network, (leveraging the significant contribution of distributors, who accounted for 95.0% of gross sales value in 2023FY) and sustained investment in its route-to-market strategy amid the still depressed consumer wallet. Furthermore, we also expect new product offerings to be supportive of revenue growth in 2024E. However, details regarding whether these products will expand existing categories or target new markets remain undisclosed. All in, we forecast a 17.0% y/y revenue growth and an average growth of 11.8% over 2025 – 2028E. Meanwhile, we expect margin pressures to persist due to high inflation and naira devaluation, with a forecasted gross margin of 32.8% (-187bps y/y) in 2024E. We project a 730bps y/y decrease in UNILEVER’s 2024E EBITDA margin to 16.6%, reflecting the higher spend on marketing and brand promotions. UNILEVER’s low leverage and positive exposure to rising rates will continue to buffer earnings amid the elevated interest rate environment. Consequently, we forecast a 72.2% y/y increase in 2024E EPS to NGN2.53 (2023FY: NGN1.47).
Key profitability ratios to improve in 2024FY: Following our expectation of more robust earnings in 2024E, we expect an improvement in key profitability ratios in 2024E. Specifically, we project 2024E ROE and ROA to print 17.0% (2023FY: 11.3%) and 10.8% (2023FY: 7.3%), respectively. Also, we expect the FCF margin to come in at 6.8% in 2024E (2023FY: -5.8%). Over our forecast horizon, we project an average free cash flow margin of 11.7% from 2025E to 2028E (Historical 5-year average: 1.7% – impacted by negative prints in 2019FY: -29.7% and 2023FY: -5.8%).
Valuation: Our year-end target price is NGN21.31/s, derived from a 60/40 blend of DCF and sector relative valuation estimates. Our DCF FV is derived from an equal blend of FCFF (NGN23.36/s) and FCFE (NGN18.04/s) estimates, assuming a 26.3% WACC and 4.0% terminal growth rate. Similarly, our multiple-based FV was derived from a blend of EV/EBITDA (NGN29.54/s) and P/E (NGN14.89/s) multiples, utilising Bloomberg’s Middle East and African peer median for both factors (5.6x and 10.1x, respectively) as multipliers.
