Unilever Reaps Benefits of Equity Financing
Goddy Egene writes that Unilever Nigeria has started to enjoy the positive impact of last year’s rights issue as its cost of funds reduced significantly in the first quarter ended March 31, 2018
“For the last three quarters, gross margins were above 30 per cent. We attribute this to the improved macro environment and more particularly, the Central Bank of Nigeria ( CBN)’s intervention in the foreign exchange ( fx) market through the NAFEX window. Management also said that Unilever was working on attaining 100 per cent sourcing of its packaging materials locally by 2019 and has begun engaging local farmers to reduce importation.”
One of the major challenges manufacturing companies operating in Nigeria face is high cost of doing business. Apart from spending huge sums to provide their own energy, they also run high expenses to sell and distribute products due to the poor road network.
Manufacturing companies equally contend with high cost of finance to remain afloat following high interest charges paid on borrowings. Although one the reasons for companies to list on the Nigerian Stock Exchange (NSE) is to have access to equity funding, which is considered cheaper than debt capital, especially, bank borrowings.
Considering the high interest rates in the country, which has led to huge cost of finance, some companies decided to activate their equity funding apparatus last year. Many of them raised funds from existing shareholders in the capital market to reduce the cost of finance and deleverage their balance sheets.
One of such companies that raised funds last year via a rights issue is Unilever Nigeria Plc. The company successfully raised the sum of N58.851 billion from existing shareholders through the issuance of 1.962 billion ordinary shares of 50 kobo per share at N30 per share.
The Managing Director/CEO of Unilever Nigeria Plc, Mr. Yaw Nsarkoh had then called on shareholders and capital market stakeholders to support the offer, saying it will position the company to deliver better value going forward.
According to him, through this rights issue, the company would be able to reinforce its financial flexibility to support its growth initiative, while giving shareholders an opportunity to consolidate their shareholding position.
“The rights issue is part of Unilever Nigeria’s long term strategic intent to strengthen the company’s capital base by deleveraging its balance sheet, support its working capital needs and position the company to exploit value accretive opportunities,” Nsarkoh said.
He explained that the net proceeds would help the company repay outstanding foreign currency denominated liabilities, purchase additional raw materials required for Unilever’s products and to meet other working capital requirements in order to build long term value for all stakeholders.
Going by the first quarter (Q1) results of Unilever Nigeria ended March 31, 2018, the positive impact of that wise decision to inject equity into the company’s operations has started to reflect. Cost of finance fell significantly by 93 per cent from N572.652 million in Q1 of 2017 to N39 million in Q1 2018. Market analysts said if the low level of finance cost was maintained throughout the year, Unilever Nigeria Plc would post another impressive results at the end of the year.
2017 Financial Results Unilever Nigeria recorded revenue of N90.771 billion for the year ended December 31, 2017, up from N69.777 billion in 2016. Selling expenses rose from N3.151 billion to N3.993 billion, while marketing and administrative expenses rose from N11.464 billion in 2016 to N11.982 billion in 2017.Finance cost stood at N3.410 billion, up from N2.721 billion. The company ended the year with profit after tax (PAT) of N11.2017 billion, showing a jump of 172 per cent from N4.106 billion in 2016. Profit after tax also grew by 142 per cent to N7.45 billion, from N3.072 billion in 2016. Based on the results, board of directors recommended a dividend of 50 kobo per share.
2018 First Quarter Results The company has sustained the impressive results for 2017, recording improved performance for the Q1 of 2018. It posted revenue of N25.817 billion in 2018, up from N 22.172 billion in the corresponding period of 2017. Gross profit stood at N7.141 billion, compared with N6.293 billion in 2017. Selling and distribution expenses increased from N947 million to N1.154 billion, while marketing and administrative expenses fell from N2.59 billion to N2.459 billion in 2018.
Profit before tax (PBT) rose from N2.180 billion to N3.923 billion, while PAT improved from N1.603 billion to N2.899 billion. An analysis of the finance cost showed that Unilever only paid N39.15 million as interest on third party loans, compared with N347 million paid the corresponding period of 2017. The company did pay anything on intra-company as against N225 million paid in 2017.
Analysts’ Assessment According to analysts at FBN Quest, while sales grew by 16 per cent, PBT and PAT grew faster by 80-81 per cent. They said although gross margin contracted by -72bps to 27.7%, that was not enough to offset the sales growth and a positive swing on the net interest line to N396 million from a net finance charge of N575 million 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 N63 billion rights issue of last year,”FBN Quest said.
They explained that compared with their estimates, Q1 sales, PBT and PAT were ahead by six per cent, three per cent and four per cent respectively.
FBN Quest said: “For the last three quarters, gross margins were above 30 per cent. We attribute this to the improved macro environment and more particularly, the Central Bank of Nigeria (CBN)’s intervention in the foreign exchange (fx) market through the NAFEX window. Management also said that Unilever was working on attaining 100 per cent sourcing of its packaging materials locally by 2019 and has begun engaging local farmers to reduce importation. As such, the 27.7 per cent figure reported this quarter surprised negatively because we expected that the company would still be enjoying benefits from the aforementioned, particularly the former.
On an annualised basis, Q1 sales and PBT are on track to meeting consensus’ FY 2018 estimates of N101bn and N15bn respectively. We expect the market’s reaction to these numbers to be neutral to slightly positive.”
In their own assessment, analysts at Cordros Capital said revenue came in better-thanexpected, operating expense was well-contained, and finance cost was significantly lower, courtesy of the borrowings repaid last year.
The Q1 revenue growth of 16 per cent was ahead of the 10 per cent we estimated, but in line with consensus. There were price increases up until Q2-17, the impact of which we believe is somewhat reflected in the latest revenue. We should also reiterate the impact of volume on revenue, reflecting the: campaigns and promotional activities that took place during the quarter(for Knorr Chicken seasoning and Close-Up toothpaste; increased activities of distributors following the slack in Q4-17, and introduction of new products, notably Sunlight bar soap and 70g and 25g Sunlight detergents. We raise 2018E revenue growth estimate to 13 per cent (previously 7.5%), based on the stronger-than-expected Q1 growth and impact of the five increase in the price of Lipton tea implemented this month.
Although Cordros Capital said given the stability of both selling prices and the naira exchange rate during the period, production costs, and consequently gross margin may have been pressured by the rising price of petroleum products (which form key inputs in Unilever’s production process).
“Notwithstanding the low outturn, we retain our gross margin estimate of 32 per cent for 2018E. Gross margin in Q1-17 (28 per cent) was the lowest in all quarters of last year, before the improvement seen in the subsequent quarters,” they said.
According to the analysts, Unilever’s balance is healthier as total borrowings reduced to N457 million, from N674 million as at end-December 2017, with gross debt-to-equity now at 0.6 per cent , vs. 191 per cent a year ago.
“Cash remained strong at N47.5 billion, delivering interest income of N494 million (89 per cent via bank deposits) that far exceeded the N130 million we estimated for the quarter,” they said.
In their valuation of the stock, Cordros Capital said they maintained their Sell recommendation but increase target price to N32.78 (previously N30.47) “even as we slightly revise our estimates.”