April 23, 2019/Cordros Report
Event: UNILEVER published Q1-19 results after close of market on Thursday, showing declines across key lines: revenue (-20.8% y/y), EBIT (-60.4% y/y), and net profit (-20.8% y/y).
Q1-19 revenue was lower by 20.8% y/y and 6.6% q/q, clearly indicative of lower volume outturn during the period. In its Q1-19 trading update, Unilever NV (UNILEVER’s parent company) attributed the volume weakness to “trade disruption surrounding the elections in Nigeria”. That aside, we should also reiterate the increasing competitive landscape –– that UNILEVER faces with a growing number of market players, especially in the HPC space, as well the still weak consumer demand. Revenue has now declined for three consecutive quarters, the most recent figure being the lowest since Q3-16.
Dissecting its revenue breakdown, we note that both its product segments remain challenged. Pointedly, the Food (-13% y/y and -10% q/q) and HPC (-10% y/y and -3% q/q) lines extended their quarterly declines from Q2-18.
In Q1-19, COGS declined at a slower pace of 12.6% y/y, consequently producing gross profit decline of 42.5% y/y. Gross margin compressed to 20.1% during the period, the lowest on record. In our view, the decline in production costs was as a result of lower soft commodity prices, as well as reduced domestic inflationary pressures, and FX stability, compared to a year ago.
OPEX moderated by 24.1% y/y in Q1-19, with the ratio-to-revenue coming in at 13.4%. The result shows a 44% decline in overheads (50% of total OPEX), although, further breakdown of this item was not provided. Despite recording other income of NGN26.33 million, EBITDA declined 26.2% y/y.
Elsewhere, net finance income came in at NGN710 million vs. NGN372 million in Q1-18, on the back of higher finance income from a sizeable cash balance (NGN38.34 billion) and flattish finance costs.
Notably, operating cashflow (-225% q/q) was dragged by higher net receivables (NGN21.3 billion), following a 208% increase in advances and prepayments (26% of total receivables), and a 1,867% increase in deposit for imports (10% of total receivables)
Compared to Q4-18, PAT was down 15.7%, driven by lower revenue (-6.6%), weaker gross margin (-596 bps), and lower net finance income (-42.9%). Effective tax rate in the quarter was 25.0%, up from 13.6% and 40.9% respectively in Q4 and Q3, in the absence of any deferred tax credit.
Comment: UNILEVER’s Q4 PAT is below our expectation, and is unimpressive, in our view. We expect a negative reaction in the market. Our estimates are under review.