UNILEVER NIGERIA PLC – Food product business remains the Company’s cash cow

Unilever Nigeria Plc (The Company) was established in 1923 as a soap manufacturing company – West Africa Soap Company – by Lord Leverhulme. It later became known as Lever Brothers Nigeria. Today, it is the longest serving manufacturing organization in Nigeria. After a series of mergers and acquisitions, the Company diversified into manufacturing and marketing of foods and personal care products. These mergers and acquisitions brought in Lipton Nigeria Limited in 1985, Cheesebrough Industries Limited in 1988 and Unilever Nigeria Limited in 1996. The Company changed its name to Unilever Nigeria Plc in 2001 in line with the global strategic direction of the business. Unilever Nigeria’s confidence in the Nigerian economy is unwavering. The Company was quoted on the Nigerian Stock Exchange in 1973 and is a truly Multi-local Multinational organization with very outstanding international and local brands in her portfolio. The international brands include Close-Up toothpaste, Pepsodent toothpaste, LUX beauty soap, Lifebuoy soap, Rexona, Vaseline lotion and Vaseline Petroleum Jelly in the Personal Care Unit of the business; BlueBand Margarine, Lipton Yellow Label Tea and Knorr bouillon cubes in the Foods Unit; and OMO Multi-Active Detergent, Sunlight washing powder and Sunlight Dish washing liquid in the Home Care Unit. Other Regional and local jewels include the Pears Baby Products range and Royco bouillon cubes. Recently, Unilever Nig. Plc released its audited financial statement for full year 2016 showing an impressive performance. Growth was recorded in revenue and profitability. Remarkable growth in profitability markers above revenue growth is largely driven by management success in reducing operating expenses and substantial increase in finance income. The Company maintained its regular dividend payment, and has recommended a total dividend payment of N378m (on the basis of N0.10 per share) for every 50 kobo share payable on Friday, 12th May, 2017.

INCREASED COST OF OPERATION ERODES TOP-LINE EARNINGS

For the twelve-month period ended, December 2016, Unilever Nigeria Plc grew turnover by 17.82% to N69.78 billion from N59.22 billion recorded in December 2015. The Company’s performance shows steady growth of 31.59% and 21.68% in revenue generated by personal care and food products respectively, while home care recorded marginal rise of 1.62%. Further insight reveals that the Company’s core business of food products production continues to account for the largest percentage of 52.16% of 2016 earnings and 50.51% in 2015. However, cost of operation grew notably to N49.48 billion from N38.17 billion over the period; representing a growth of 29.62%. The increment rose from the combined effect of rises in various components of operational expenditures especially: raw materials, assets, depreciation, IT cost and utilities expenses which increased by 24.59%, 105.97%, 21.34%, 57.29% and 30.99% respectively, which we believe was caused by inflation and prevailing macro-economic headwind in the economy. Expectedly, due to the higher growth in cost of operation over generated revenue, gross profit dropped by 3.57% to N20.3 billion in the full year 2016 from N21.05 billion reported for the full year 2015.

REDUCTION IN ADMINISTRATIVE EXPENSES POSITIVELY IMPACT PROFITABILITY

The Company’s management increased activities towards curtailing expenditures which yielded positive result as it was able to reduce administrative expenses notably by 15.96% to N11.46 billion in December 2016 compared to December 2015 figure of N13.64 billion. This was in spite of an increase in utilities. However, selling and distribution expenses requires specific strategic plan as it rose by 10.79% to N3.15 billion from N2.84 billion year on year. Hence, operating profit grew notably by 25.12% to N5.81 billion from N4.64 billion recorded in the corresponding period of 2015. Net financial cost records a considerable decline of 40.79% to N1.7 billion from N2.87 billion over the period under review. This was driven by an impressive rise in finance income of 240.40% over finance cost significant reduction of 14.01%. As a result of the diminished operating expenses and higher growth in finance income, the Company recorded an enormous growth of 131.86% in profit before tax to N4.12 billion in the full year ended, December 2016 over N1.77 billion reported in the corresponding period of 2015. Income tax expense grew by a 78.77% to N1.03 billion from 2015 figure of N578.7m. Consequently, profitability preserves massive growth of 157.63% in Unilever Nigeria Plc’s profit after tax, which rose to N3.07 billion in December 2016 from N1.19 billion reported in December 2015.

ASSET QUALITY

The Company’s key performance metrics remains strong as current ratio rose to 0.79 as at December 2016 from 0.61 as at December 2015. Return on average equity (ROAE) currently stands 31.20% and return on average asset (ROAA) at 5.01%. It is noteworthy that as at 31st December, 2016 the Company long term borrowings increased to N20.50 billion from N7.43 billion a year ago, indicating a massive rise of 176.05%. Further insight into the financial statement shows that a 6.45% interest rate plus 3 months US Libor unsecured loan facility of $59.7 million (N18.8billion) was obtained during the year from Unilever Finance International AG for the purpose of clearing backlog of unpaid obligations to suppliers. The loan is repayable within one year.

WE UPGRADE OUR RECOMMENDATION TO A HOLD

In the long-term, we look forward to sustained growth in profitability for Unilever Nigeria Plc which would depend largely on the resultant impacts of innovative advertisement, expansion and increased efficiency in operating cost reduction. While consumer spending declines as inflation increases, we expect the potential of increased economic activities in the coming year to result in growth of its core business activities, revenue and profitability. Considering the above, we cautiously make our projections for gross earnings of N72.98 billion for the 12-months financial year end, December 2017 and a net income of N3.91 billion for December 2017, leading to a forward EPS of N0.85. With a company Price to Earnings (PE) multiple of 38.72x, we arrived at a 6-month target price of N33.82 for Unilever Nigeria Plc which leads to a potential upside of 2.48%. We therefore recommend a HOLD recommendation.

IN THE LONG-TERM, WE LOOK FORWARD TO SUSTAINED GROWTH IN PROFITABILITY FOR UNILEVER NIGERIA PLC WHICH WOULD DEPEND LARGELY ON THE RESULTANT IMPACTS OF INNOVATIVE ADVERTISEMENT, EXPANSION AND INCREASED EFFICIENCY IN OPERATING COST REDUCTION