July 29, 2024/United Capital Research
Unilever Nigeria Plc HY 2024: Sustaining Profitability Through Strategic Initiatives: A Case Study on Boosting FX Earnings and Exiting Unprofitable Segments
Unilever Nigeria Plc (“the company”) maintained strong and impressive turnover rate in six months (H1-2024) of 2024 (up by 40.9% y/y, from N45.35bn in 6M-2023 to N63.9bn), despite the challenging macro-economic environment that was underpinned by lower consumers’ purchasing power. This was catalysed by the transfer of cost burden to consumers in the form of price hikes, amid increased pressure on food inflation component. The unique segmentation of the Company’s business into Food Products (FP), Personal Care (PC) products, and Beauty & Wellbeing (B&W) products, played a crucial role in the Company’s performance, following its exit from the unprofitable market for Homecare products in 2023. The Company’s “FP” business segment accounted for 58.1% (N37.1bn) of its total revenue generated in H1-2024, its “PC” business segment accounted for 34.7% (N22.2bn) of total revenue generated, while the “B&W” business segment accounted for 7.2% of total revenue generated. Overall, the company maintained its profitability status in H1-2024, recording a very significant 60.7% y/y climb in its net income (Profits after Tax), from N2.8bn to N4.4bn. This represents 52.6% of the total PAT (N8.4bn) realized in FY 2023.
v Strategic Exit from Unprofitable Business Segment Enhances Focus on Margin-Accretive Businesses
On the 17th of March 2023, Unilever Nigeria Plc announced its intention to exit the homecare business categories in Nigeria. Consequently, the Company exited the homecare business category in September 2023. All production of Home Care products ceased in June 2023 and sales ceased in September 2023 following a strategic decision to place greater focus on the Company’s margin accretive products. For context, the Company recorded N8.0bn loss after discontinuing homecare operations. This was catalised by weak turnover rate, with revenue generated in 2023 printing at N10.5bn, 47.2% y/y lower than N19.9bn generated by the homecare business in 2022. Following the exit from the homecare business, the Company separated the Beauty & Wellbeing and Personal care business, for each of the two segments standing independently. This will help the Company increase its depth and scope of operations in the two business segments going forward.
v Revaluation Gains Optimised Cost of Sales
In H1-2024, Unilever Nigeria Plc incurred revaluation gains on foreign currencies denominated balances, amounting to N2.5bn. This is contrary to the revaluation loss of N14.4bn recorded in H1-2023. Putting things in perspective, the company increased its ability to earn FX, via increasing focus on exporting its products outside Nigeria. Unilever Nigeria Plc recorded total revenue of N1.96bn (3.1% of total revenue) from its exports outside the borders of Nigeria, up by 197.0% y/y from N661.6mn (1.5% of total revenue of N45.35bn in H1-2023). Ultimately, the Company’s strategy doused the expected pressure on overall COS in HY-2024, with COS printing at N37.7bn, up by 16.8% from N32.3bn.
v The Torrid Inflation Environment and Government Policy Shift Drives Surge in OPEX
A blend of the torrid inflation environment and the policy shifts from the government caused Unilever Nigeria Plc’s marketing and distribution expenses to surge by 138.2% y/y in HY-2024 to print at N19.7bn from N8.3bn in H1-2023. A substantial climb in the Company’s Brand & Marketing (up by 177.2% y/y, from N2.85bn to N7.9bn) and Overhead (up by 251.2% y/y, from N2.1bn and N7.2bn) expenses drove the observed surge. The observed increase in the Company’s Brand & Marketing expenses was particularly driven by an increase in media expenses for personal care and nutrition categories to support various projects and campaign. The expenses also include investment across brands to improve product visibility in trade. As for the observed increase in overheads, it was driven by the impact of Naira devaluation on foreign denominated obligations, investment in capability development and general inflation on goods and services. This surge is expected to be one-off, limited to the financial period 2024.
Outlook and Investment Recommendation (BUY: Target Price N22.00/share)
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 the Company’s businesses, and the positive consumer sentiments around its products, Unilever Nigeria Plc is expected to remain profitable in FY-2024. The Company’s strategy to improve its ability to earn FX will also play a vital role. Also, we expect the fiscal intervention on inflation to continue to help douse overall inflation pressure in the Nigerian economy, which should help reduce the pressure on the Company’s OPEX in H2-2024.
Given the fact that UNILEVER 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 potential and ability to outperform overall sector performance.
