Business Hilights
Tracking Nigeria's Headline Business News Online

UNILEVER’s high exposure to FX risk remains a key downside risk

Stock market pundits say they hold a cautious outlook on UNILEVER in the near term, mainly due to the increasing price competition in the home and personal care (HPC) segments from listed and unlisted brands amid the tight consumer wallet.

Across section of experts who spoke with Business Hilights said although they like that management intends to focus on the mass mainstream segment to appease price-sensitive consumers, they equally highlight that UNILEVER’s high exposure to FX risk remains a key downside risk.

According to them, for clarity, they note that UNILEVER imports c. 50.0% of its raw materials. We expect the food segment to still account for a lower share of revenue, especially as the tea business is fully exited; nonetheless, we still see scope for growth on the back of sub-inflationary price increases. Overall, we expect the company to maintain positive earnings in 2022E, underpinned mainly by double-digit topline growth. With a revised target price of NGN12.63, we retain our “HOLD” recommendation on the stock.

Positive revenue growth after two consecutive years of decline: UNILEVER reported revenue growth of 35.1% y/y in 2021FY, primarily driven by the company’s HPC (+47.1% y/y) segment, while the Food (-10.6% y/y) segment declined. We believe the topline growth was supported by (1) higher volumes from its tier 4 products (launched in 2020), (2) increased investment in its distribution network and (3) marginal price increases in some core products. In addition, we highlight support to topline growth from increased credit sales to distributors as management loosened its tight credit policy. Pertinently, the HPC (56.0%; 2020FY: 43.6%) segment’s contribution to revenue increased, while that of the Food (44.0%; 2020FY: 56.0%) segment declined. This did not surprise us, given the discontinuation of UNILEVER’s tea business, which previously contributed c. 14.0% to the Food sales outturn. The impressive topline growth offset cost pressures and drove profitability. Consequently, EPS turned positive at NGN0.59 (including gains from the tea business disposal) compared to the loss per share of NGN0.65 in 2020FY. Adjusting EPS for the disposal gains, EPS outturn was still positive, albeit lower at NGN0.12.

Volume-led growth to support sales in 2022E: For 2022E, we believe management’s strategy to focus on the mass mainstream segments by reinvesting heavily in its tier 3 and 4 brands with lower prices bode well for volume expansion in the HPC segment. Thus, we forecast revenue will grow by 6.3% in 2022E. Further out, we estimate a revenue CAGR of 5.5% over 2022 – 2026E. Although management stated its intention to source raw materials locally to abate its FX losses, we do not expect a material impact on earnings in the near term. Thus, we model a 55bps decline in the 2022E gross margin, reflecting the impact of elevated cost pressures. Nonetheless, we forecast a 97bps increase in EBITDA margin to 7.6%, as we estimate a lower OPEX-to-sales ratio (2022E: 26.1% | 2021FY: 27.3%). Overall, we estimate that EPS will decrease by 55.5% y/y to NGN0.26 in 2022E. Adjusting 2021FY EPS for the disposal gains (adj EPS: NGN0.12), we estimate 2022E EPS will grow by 116.7% y/y.

Valuation: The net impact of our changes is an upward adjustment in our price target to NGN12.63 (previously: NGN12.52). Hence, we maintain our “HOLD” rating. On our estimates, UNILEVER trades at a 2022E P/E of 50.7x, a significant premium to the MEA peer average of 16.7x.