November 12, 2024/Cordros Report
UNILEVER delivered solid Q3-24 results, with notable gains in revenue and gross margin expansion. Nevertheless, the company continues to face considerable pressure from rising operating costs, mainly due to naira devaluation and inflation. Looking ahead, we anticipate sustained revenue growth, bolstered by price increases and seasonal demand, especially within the Food Products segment. However, increasing operating expenses and currency-related challenges remain significant obstacles to margin expansion. Reflecting the preliminary figures and the robust revenue growth amidst these heightened cost pressures, we have adjusted our target price to NGN22.49/s (prev.: NGN20.68/s) but maintain our “HOLD” recommendation on the stock. Our estimated DPS for 2024E is NGN1.52, yielding 6.2% at the last closing price (NGN24.00/s). Based on our estimates, UNILEVER’s 2024E P/E and EV/EBITDA multiples are 8.1x and 3.7x, respectively. This compares to MEA peers’ forward average PE and EV/EBITDA multiples of 7.1x and 5.3x, respectively.
Still strong earnings outlook on improved topline: Following UNILEVER’s Q3-24 stellar revenue performance and our expectations of sustained price increases and volume growth amid continued investment in its route-to-market strategy, we raise our revenue projection for 2024E to 35.8% y/y (prev.: +29.6% y/y). Further out, we forecast an average revenue growth of 17.9% over 2025E – 2028E. Accordingly, we model a 534bps y/y increase in the 2024E gross margin to 40.0% (2023FY: 34.7%), reflecting the strong revenue growth and enhanced cost management efforts, as the company continues to increase its advances and prepayments to leverage favourable pricing opportunities for raw and packaging materials. However, we forecast an 806bps y/y decline in EBITDA margin to 15.8% amid a projected 124.4% y/y increase in operating expenses, owing to the persistent inflationary pressures and expected escalation in advertising costs. Nonetheless, we estimate EPS at NGN2.97 in 2024E (prev.: NGN2.52 | 2023FY: NGN1.47) further supported by mitigated FX losses through improved localisation of raw materials, and export gains. Further out, we forecast an EPS CAGR of 9.1% over 2025-2028E.
Margin gains amid sector challenges: UNILEVER has experienced margin improvement in recent years, with gross margin advancing from 11.0% in 2019FY to 34.7% in 2023FY. In 9M-24, gross margin further strengthened to 41.0%, defying sector-wide cost pressures from inflation, foreign exchange constraints, and supply chain challenges. This margin resilience reflects UNILEVER’s robust revenue growth, improved cost recovery, and gains from their localization strategy. The company has also leveraged advances and prepayments to secure favourable pricing terms, which significantly reduced its cost-to-sales ratio to 58.7% in 9M-24 (9M-23: 68.0% | 2023FY: 65.3%). Reflecting these cost controls and local sourcing benefits, we anticipate UNILEVER’s gross margin to remain strong and settle at 40.0% in 2024E (+806bps y/y) and average 40.5% over 2025-2028E (5-year historical average: 26.9%).
Valuation: Our year-end target price is NGN22.49/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 (NGN22.31/s) and FCFE (NGN17.57/s), assuming a 28.1% WACC and a 4.0% terminal growth rate. Similarly, our multiple-based FV was derived from a blend of EV/EBITDA (NGN31.64/s) and P/E (NGN20.98/s) multiples, utilising Bloomberg’s Middle East and African peer median for both factors (5.3x and 7.1x) as multipliers.
