July 19, 2018/InvetmentOne Report
Recent Rally Eliminates Upside
We upgrade our recommendation on Unilever Nigeria Plc to a HOLD with a target price of N50 following the release of its Q1 2018 result. Unlike the share price of Nestle Nigeria Plc, which has shed 3.52% year-to-date (YTD), Unilever Nigeria Plc recorded a 26.46% improvement in its year-to-date performance. We opine that, despite the increasing competition in the consumer space especially in this post-FX period and expected uptick in inflation in H2 2018, the stock may continue to see support from the on-going recovery in the domestic economy and election spending, which may be positive for consumer spending.
We opine that topline performance may continue to be more volume driven in FY 2018. Furthermore, we expect continued operating efficiency, low interest rate environment as well as the benefit of the right issue to bode well for FY 2018 bottom line performance.
Our N50 price target is derived using a discounted cash flow (DCF) model over the 2018-2027 period. We assume that sales growth reaches a terminal value of 10.0% in 2027 while EBIT improves to 14% by 2027 from our 2018 estimates. Our WACC is 16.6%, assuming 13.0% risk free rate, 0.73 beta, 13.4% after tax cost of debt and 5.0% equity risk premium.