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UNILEVER’s 9M-22 numbers fell short of expectations—Cordros Research

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UNILEVER’s 9M-22 numbers fell short of expectations, as the company reported a loss per share of NGN0.06 (9M-21 EPS: NGN0.19) underpinned by the slow revenue growth in the period, Cordros Research has averred.

As alluded to in Cordros Research last update, the increasing competition from cheaper unlisted brands amid the real wage decline likely diluted volumes and constrained sales expansion in 9M-22 despite price increases instituted during the year – our channel checks reveal that the company raised its prices across its product portfolio by c. 15.0%. Besides, cost pressures remain elevated for the producer given the highly inflationary environment and currency risk exposure. For the rest of the year, though we expect an improvement in demand in Q4-22E, especially in the company’s Food Products segment driven by festive-induced consumption, we believe UNILEVER’s profitability will remain under pressure. Therefore, reflecting the preliminary numbers in our model and accounting for the increased cost pressures, we lower our target price to NGN11.31 (prev.: NGN13.05) but retain our “HOLD” recommendation on the stock.

Sluggish Sales Growth Drives Weak Earnings: UNILEVER reported revenue growth of 10.3% y/y in 9M-22, underperforming our expectations, with the sluggish outturn driven majorly by the revenue lag in the Food Products (+0.6% y/y | 47.3% of revenue) segment. On the other hand, HPC sales (48.5% of revenue) grew by 20.7% y/y. We believe lower volumes drove the sub-par revenue performance in the quarter as our channel checks reveal that the company raised its prices across its product portfolio by c.15.0%. Also, the cost pressures prevalent in the operating environment pressured gross (-49bps y/y to 26.5%) and operating (EBITDA: -155bps y/y to 3.7%) margins downwards. Consequently, EPS turned negative at -NGN0.06 compared to the 9M-21 outturn (NGN0.19).

Cost Pressures to Undermine 2022E Earings: Following the adjustments to our model to reflect UNILEVER’s preliminary numbers for 2022FY, we raise our revenue growth projection for 2022E to 19.4% y/y. Further out, we forecast an average revenue growth of 18.4% over 2023E – 2026E. Further down, we model a 185bps y/y decline in the 2022E gross margin, reflecting the impact of elevated cost pressures. Explicitly, we expect the pressures to stem from the highly inflationary environment and UNILEVER’s exposure to FX volatility. Consequently, we forecast an 85bps y/y decline in EBITDA margin to 5.8% amid a projected 15.5% y/y increase in operating expenses. Overall, we estimate EPS will decrease by 30.6% y/y to NGN0.08 in 2022E (2021FY: NGN0.12). Further out, we forecast an EPS CAGR of 38.2% in 2023-2026E.

Valuation: The net impact of our changes is a downward adjustment in our price target to NGN11.31 (previously: NGN13.05). Hence, we maintain our “HOLD” rating on the stock. On our estimates, UNILEVER trades at a 2022E P/E of 120.7x, a significant premium to the MEA peer average of 18.5x.

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