Unilever Nigeria Q3 2018: Lower Finance Cost & Sales of Spread Business Boost PBT

October 30, 2018/InvestmentOne report 

·         Mixed topline growth: down 1.9% q/q, up 6.6% y/y.

·         Lower gross profit margin: down 418bps q/q, 118bps y/y

·         Mixed opex/sales ratio: down 127bps q/q, up 214bps y/y.

·         Higher PBT margin performance: up 577bps q/q, 1361bps y/y  . 

Unilever Nigeria Plc released its Q3 2018 results last week. The published result was supported by the gains on sales of its spread business and lower finance charges, which offset weaker gross profit margin performance. 

Consequently, PBT margin advanced by 1,361bps y/y, following a net finance income of N846million in Q3 2018 against a net finance cost of N946million in Q3 2017 as well as the N2.24billion realized from the sales of its spread business, which outweighed the 118bps y/y contraction in gross profit margin. 

Slower Topline Growth 

Unilever’s Q3 2018 topline growth remained weak, advancing by 6.6% y/y to N24.18billion, the slowest since Q3 2015. Similar to Q2 2018, we suspect the moderation in growth may be due to the increased competitiveness in the consumer goods space especially in this post FX period as well as weak consumer spending. On a segmental basis, we observed growth in the company’s food business, up 18.9% y/y to N12.11billion. The growth in the food business was the sole driver of growth in the quarter as revenue generated from the Home and Personal Care segment (HPC) contracted by 3.3% y/y in Q3 2018. This is in consonant with management’s disclosure that the HPC segment has been under pressure in recent times. 

We highlight that Q3 2018 y/y topline was largely volume driven, as gross profit inched up 2.7% to N7.53billion despite the decline in gross profit margin to 31.2%. 

On a sequential basis, topline was somewhat flat, down 1.9%, largely due to the 3.0% q/q reduction in the HPC segment. Furthermore, gross profit margin plunged by 418bps to 31.2% on the back rising cost, which consequently weighed in on gross profit performance. 

Opex/Sales Ratio Remains High 

Opex/sales ratio continued to remain high, increasing by 214bps y/y to 22.8% in Q3 2018. Unlike Q2 2018 where the rise in operating expenses was driven by increase in overheads and brand and marketing expenses, the rise in operating expense in Q3 2018 was majorly due to the increase in service fees to N1.36 billion from N143.56million in Q3 2017. We await management clarification on this.  

Operating Margin Remains Weak

Although operating margin appeared stronger in Q3 2018, up 635bps q/q and 594bps y/y to 18%, it was majorly supported by the N2.24billion in other income recorded in the quarter. The other income was majorly realized from the gains on the disposal of its spread business in July 2018, which it has since held as discontinued operations in its books. We recall that management had highlighted that the spread business was underperforming, hence, the need for its disposal. Netting out the impact of the other income on operating performance, operating margin would have been 8% in Q3 2018, which would have been lower both y/y and q/q. 

Cash balance supports strong interest income 

Unilever continued to benefit from the deleveraging exercise undertaken in 2017. This may have buoyed the 738.3% y/y increase in its cash and bank balances to N46.76billion thereby supporting the 298.1% y/y improvement in its finance income in Q3 2018. 

Furthermore, the deleveraging exercise drove down total loan outstanding to N4.30million in Q3 2018 from N7.96billion in Q3 2017. As a result, debt-to-equity ratio declined to 0.01% as at the end of Q3 2018 from 49.34% in Q3 2017. 

On a quarterly basis, Unilever recorded a lower net finance income of N846million, 15.9% lower than Q2 2018. This was due to the 32.3% q/q increase in finance cost as well as the 12.38% q/q decline in finance income. We suspect the weakening in finance income may have been driven by the lower yield environment in Q3 2018 relative to Q2 2018, while the quarterly rise in finance expense came in despite its relatively stable debt position.   

Negative cash flow from operations 

Although Unilever’s overall cash position continue to be supported by the right issue undertaken in 2017, its ability to generate cash from its core operation remains a concern. We highlight that nine months 2018 net cash flow generated from operation came in negative, weighed down by the payment of N3.00billion in tax and higher trade and other receivables, when compared to H1 2018. The rise in trade receivables in Q3 2018 may have been stirred by management’s drive to grow volume amidst competition.  

Going forward, topline growth may continue to be moderated by intense competition and the expected rise in inflation in the rest of the year may weigh in on consumer spending. However, we expect topline performance in the near term to see support from election spending, the potential increase in minimum wage and expected acceleration in the implementation of the 2018 budget. While the rise in operating expense has been negative for performance, we expect management to curb future increases to support bottom line performance. This said, our downside risk remains, heightened political risk, poor implementation of the 2018 budget as well as an unanticipated disruption in the FX space. 

Our pricing model is under review. 

Unilever Nigeria Plc Q3 2018/ 9M 2018 figures. YE: DEC (N ‘millions)

 

Q3 2018

Q/Q

Y/Y

   9M 2018

Y/Y

Sales

24,180

-1.9%

6.6%

72,305

10.7%

Cost of Sales

-16,647

4.4%

8.5%

-49,450

10.6%

Gross Profit

7,533

-13.5%

2.7%

22,855

10.9%

Gross margin

31.2%

-418bps

-118bps

31.6%

5bps

OPEX

-5,512

-7.1%

17.7%

-14,625

23.2%

Opex/sales

22.8%

-127bps

214bps

20.2%

205bps

Net finance cost

846

-15.9%

-189.4%

2,182

-198.2%

PBT

5,106

34.9%

199.8%

12,652

94.1%

PBT margin

21.1%

577bps

1361bps

17.5%

752bps

Tax

-1,260

30.7%

142.7%

-3,206

67.5%

Tax rate

25%

-81bps

-580bps

25.3%

-403bps

PAT

3,846

36.4%

224.8%

9,446

105.2%

PAT margin

15.9%

447bps

1068bps

13.1%

601bps

 Source: Company financials, Investment One Research

 

opan



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