April 16, 2018/FBNQuest Research
PT and earnings cut; downgrading to underperform
Unilever’s Q4 2017 results came in behind our forecasts. Consequently, we have cut our EPS estimates over the 2018-19E period by 15% on average. Management guided that the funds raised (N58.9bn) from its recently concluded right issue will be channeled towards the repayment of intercompany loans, working capital support and expansion plans. However, no additional information was provided regarding the exact figures/proportions as to the use of proceeds. On the back of the cuts to our earnings forecasts, we have reduced our price target by 6% to N39.8.
Unilever shares are trading on a 2018E P/E of 25.4x for 2019E EPS growth of 19% y/y. This year, Unilever’s shares have returned 26.8% and outperformed the broad index by 19.8%. From current levels, our price target implies a downside potential of -23.5%. As such, we are downgrading the stock to Underperform from Neutral.
Q4 2017 PBT and PAT up significantly
Q4 2017 results showed growth on major key P&L items. Sales of N21.6bn grew by 9% y/y while PBT and PAT advanced by 69% y/y and 74% y/y to N4.4bn and N2.6bn respectively. The stronger y/y growth seen on the bottom line was driven by a +659bp y/y gross margin expansion to 35% and net finance income of N610m versus a net finance charge of –N98m in the corresponding quarter of 2016. These positives were strong enough to offset a 23% y/y increase in operating expenses. PAT grew faster (relative to PBT) due to a lower tax rate of 40% versus 42% in Q4 2016.
Outlook: cautiously optimistic
Unilever has shown consistent signs of recovery over the last few quarters in terms of topline growth, gross margin expansion and softer finance charges – thanks to the influx of cash from the rights issue and the pick-up in the economy. To support its operating margins, the company recently announced its intention to source 100% of its packaging materials locally by 2019 and has begun engaging local farmers to reduce importation. For FY 2018, we see sales and PBT growing by 17% y/y and 48% y/y respectively. Nonetheless, we continue to believe that the major risk the company faces is increased competition arising from importers who were crowded out when FX was not readily accessible and rates were not favorable.