The recently released 2017 results of the leading fast moving consumer goods (FMCG) manufacturers, Unilever Plc., have indicated strong footing on the Nigerian market even in the face of economic challenges faced by the nation last year.
The full year revenue (+30% y/y), EBITDA (+107% y/y), and net profit (+143%) of NGN90.77 billion, NGN17.28 billion, and NGN7.45 billion beat consensus NGN89.49 billion, NGN13.46 billion, and NGN5.7 billion respectively. The result is broadly consistent with several experts’ permutations, except for wider variance on finance income and effective tax lines.
According to the results, revenue growth of 8.7% y/y was below the average of 39% recorded quarterly between Q1-Q3. And compared to Q3, revenue was lower by 10%, the first in two years. Given that average price in Q4-17 was higher compared to Q4-16 by more than the rate of revenue growth, as many observers felt that the effect of seasonality on volume did not happen.
Strong margin trend maintained in Q4-17: Gross margin expanded by 660 bps y/y and 338 bps q/q respectively to 35% – the highest since Q1-16.
The gross margin, which is close to the pre-2016 average of c.36%, was achieved through reduction in per unit production cost. EBIT margin expanded lesser on y/y basis (391 bps), following a (1) 23% y/y increase in operating expenses and (2) negative other income (vs. NGN120 million in Q4-16).
In their review of the results, Cordros Capital Limited averred that “We expect net earnings growth to moderate in 2018E, as the impact of pricing on both revenue and margins tank. We forecast c.8% revenue and EBITDA growth, flattish gross and EBITDA margins, and 39% growth in net profit”.
“Maintaining operational efficiency, as seen in Q4, will be crucial to earnings growth. A major catalyst to earnings is the expected significant reduction of finance charges on much deleveraged balance sheet. Compared to our previous estimate, we revised 2018E net earnings estimate higher by 11%, to reflect higher gross margin and much lower finance charges estimates.
On valuation, Cordros Capital said “We reiterate SELL rating on TP of NGN30.47. On our estimate, the stock trades on a one-year (2018E) forward P/E and EV/EBITDA multiples of 30.4x and 14.1x respectively, representing significant discounts to the company’s five-year historical averages of 57.1x and 17.9x, but at premium to Middle Eastern (16.1x and 6.8x) peers”.
