July 24, 2024/Cordros Report
In this report, we provide an updated view on Unilever Nigeria Plc (UNILEVER) for 2024FY following a review of its Q2-24 results. UNILEVER’s topline has remained sturdy driven by higher pricing and increasing volumes, despite the weak macroeconomic backdrop. Elevated cost pressures from naira devaluation and inflation led to a surge in OPEX (+190.6% y/y) and an operating loss in the period, even as the strong revenue growth helped to partially offset this impact. Consequently, the operating loss was lower in Q2-24 (NGN386.36 million | Q2-23: NGN1.45 billion). While we anticipate a sustained revenue growth for the rest of 2024E, we are concerned about potential further margin deterioration due to the still weaker currency and inflationary pressures. Consequently, we lower our target price by 3.0% to NGN20.68/s (previous: NGN21.31/s) and downgrade our recommendation to a “HOLD” (previous: “BUY”). Our estimated DPS for 2024E is NGN1.15, yielding 6.3% at the current price (NGN18.10/s). Based on our estimates, UNILEVER’s 2024E P/E and EV/EBITDA multiples are 8.0x and 3.1x, respectively. This compares to MEA peers’ forward average PE and EV/EBITDA multiples of 10.1x and 5.6x, respectively.
Revenue growth to remain strong in 2024E: Over H2-24, we expect sustained improvement in UNILEVER’s topline performance, hinged on a still optimal price/volume mix. We foresee sustained higher pricing during the year to counteract rising inflationary pressures. With the successful launch of a new product in Q1-24 (Rexona 72-hour deodorant) and increased investments in branding to boost market share, we anticipate that volume growth will be sustained as market penetration deepens. Given these expectations, we revise our revenue growth estimate to 29.6% for 2024E (previous: +17.0% y/y). Owing to persistent inflationary pressures and expected escalation in media investment aimed at enhancing brand awareness for continued operations, we forecast EBITDA margin to now print 13.9% (previous: 16.6%) in 2024E. Overall, the net impact of our model revisions translates to a reduction in our 2024E EPS forecast to NGN2.25 (previous: NGN2.53).
Cost pressures challenge efficiency gains: UNILEVER’s ongoing efforts to localize its raw materials sourcing have significantly enhanced its business efficiency and reduced exposure to foreign exchange revaluation losses. With two-thirds of input materials now locally sourced and annual import spending declining, over 50.0% of total material purchases are now local. However, if poorly managed, increased cost pressures could negate some benefits from this improved efficiency. Consequently, our model adjustments indicate a lower ROA of 10.1% (previous: 10.8% | 2023FY: 7.3%) and a reduced ROE of 16.0% (previous: 17.0%, 2023FY: 11.3%).
Valuation: Our year-end target price is NGN20.68/s, derived from a 60/40 blend of DCF and sector-relative valuation estimates (P/E & EV/EBITDA). Our DCF FV is derived from an equal blend of FCFF (NGN23.01/s) and FCFE (NGN17.75/s) estimates, assuming a 23.3% WACC and a 4.0% terminal growth rate. Similarly, our multiple-based FV was derived from a blend of EV/EBITDA (NGN27.38/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) as multipliers.
