April 25, 2018/FBNQuest Research
Limited changes to earnings forecast
Unilever Nigeria’s (Unilever) Q1 2018 results were broadly in line with our estimates. As such, we have made limited changes to our earnings forecasts over the 2018-19E period. Nevertheless, we have increased our price target by 8% to N43.1. This comes on the back of a 100bp reduction in our risk free rate assumption to 13% due to the declining interest rate environment.
Although Unilever’s shares have returned 29.3% this year and have outperformed the broad index and the sector by 22.6% and 19.4% respectively, they have slightly underperformed in the last month The shares are trading on a 2018E P/E of 25.8x for 2019E EPS growth of 20% y/y versus an average P/E of around 16.3x for EPS growth of 18% y/y that our universe of consumer goods names is trading on. From current levels, ourN43.1 price target implies a downside potential of -18.6%. As such, we are retaining our Underperform rating on the stock.
Q1 2018 PBT and PAT by 80-81% y/y
Q1 2018 results showed that sales grew by 16% y/y to N25.8bn. PBT and PAT grew faster by 80-81% y/y. Although gross margin contracted by – 72bps y/y to 27.7%, this was not enough to offset the y/y sales growth and a positive swing on the net interest line to N396m from a net finance charge of –N575m in the corresponding quarter of 2017, leading to the stronger bottom line. We attribute the net finance income to the influx of cash from the successful N63bn rights issue of last year. On a sequential basis, sales advanced by 19% q/q. However, PBT declined by -11% q/q due to a -704bp q/q gross margin contraction and a -35% q/q decline in net finance income.
Outlook: still cautiously optimistic
Unilever successfully completed a N58.9bn rights issue last year. Although management disclosed that the funds will be used for the repayment of intercompany loans, working capital support and expansion plans, no additional information was provided regarding the exact figures/proportions as to the use of proceeds. However, following the completion of the rights issue, the company has reported softer finance charges. Owing to the pickup in the economy and the company’s plans to reduce reliance on imports, we continue to believe that the company is well on the road to recovery. For FY 2018, we see sales and PBT growing by 18% y/y and 48% y/y respectively.