April 8, 2019/by FBNQuest Research
8% average cut to our 2019-21E EPS forecasts
Unilever Nigeria’s (Unilever) FY 2018 performance was weighed down by weak Q4 earnings. The company made a pre-tax loss of –N30m during the quarter (compared with Q4 2017 PBT of N4.0bn) driven by a -865bp gross margin contraction y/y. Consequently, FY 2018 PBT missed our forecast by -30%. Unilever reclassified gains from its spread business sale – previously grouped under other income – as profit from discontinued operations.
Adjusting our forecasts to reflect this reclassification, the result still implies a miss of -20% on PBT. Looking at the full year trend, FY 2018 PBT grew by 19% y/y, driven by sales growth of 9% y/y, and a significant increase in net interest income. That said, sales were weighed down by the home and personal care (HPC) business. HPC sales has remained on a declining path since Q2, growing by just 1% y/y (the lowest since 2014) in FY 2018 compared with 19% y/y for the food products business. Our channel checks suggest that renewed competition (particularly from imported brands) in HPC has been largely responsible for the weak sales.
On the positive side, Unilever’s strong cash position – which drove interest income growth – provides some room for optimism. Indeed, we expect income earned from net cash (which grew 15% y/y to N57bn) to meaningfully support the bottom line over our forecast years. We have however cut our average EPS forecasts for 2019-21E by -8% on the back of lower HPC sales and thinner gross margin forecasts. Our new price target of N31.0 is -8% lower than previous. Year-to-date, Unilever shares have lost -5%, but have outperformed the broad index which down -6%. From current levels, our price target implies a downside potential of -12%. We retain our Neutral rating on the stock.
Pre-tax loss of -N30m recorded in Q4
Q4 2018 results showed that sales grew by 4% y/y to N20.5bn. However, Unilever made a pre-tax loss of –N30m. This loss was driven by a -865bp y/y gross margin contraction to 22.2% and a 27% y/y increase in opex to N4.3bn.
On a sequential basis, sales were down -15% q/q while the Q4 pre-tax loss compare with a PBT of N4.0 in the previous quarter. Q4 sales missed our forecast of N27.3bn by 25%, while the pre-tax loss was significantly behind our PBT forecast of N5.4b.