October 26, 2020/Cordros Report
Unilever Nigeria recently released its Q3-20 results with a reported loss per share of NGN0.27, its third quarterly loss in the last four quarters, owing to higher operating expenses and FX losses. Consequently, this dragged the 9M-20 loss per share down to NGN0.36. On a positive note, revenue (+93.9% y/y) grew for the first time in eight quarters, far ahead of our expectations (16.2% variance), underpinned by a strong recovery in volumes. We revise our 2020E revenue growth and gross margin estimates slightly higher owing to the strong beat. However, we expect a greater post-tax loss than previously estimated owing to the increased FX losses. Our year-end price target remains broadly unchanged at NGN10.46 (vs. NGN10.10 previously) and, thus, we retain our ‘SELL’ recommendation on the stock.
Strong Volume Driven Topline Growth in Q3: Our channel checks show that the average price across 89% of UNILEVER’s product portfolio was up c.5.6% y/y. Quarter-on-quarter, however, average prices were flat. This, in our view, indicates that UNILEVER’s Q3 topline growth (+93.9%) was underpinned by a combination of (1) the low base from last year, (2) higher average prices, and (3) a stronger volume outturn. The 24.2% q/q revenue growth reinforces our view on volume-driven growth amidst the flat pricing. Both the HPC (+107.3% y/y | +23.0% q/q) and Food (+84.8% y/y | +25.1% q/q) segments recorded significant growth. The former contributed 43.5% (Q3-19: 40.7%) to total revenue, while the latter contributed 56.5% (Q3-19: 59.3%), indicative of the increased demand for hygiene-related brands amidst the pandemic.
Gross Margin Benefits from Improved Volumes: Despite cost pressures stemming from (1) currency devaluation, (2) FX illiquidity, and (3) surging domestic inflation, and flat pricing over the last quarter, gross margin increased to 21.4% in Q3-20 compared to 19.5% in Q2-20. COGS (+ 21.2% q/q) grew slower than revenue, indicative of higher fixed cost absorption from improved volumes.
Operating and Net Margins Continue to Feel the Squeeze: We stated in our Q2 updated that we expected elevated marketing and admin expenses to pressure earnings this year as management stated it would continue to invest in brand promotional activities to boost volumes. True to our prognosis, marketing and admin surged 80.3% y/y and 35.5% q/q, offsetting some of the gross margin gains and leaving EBITDA margin at -3.3% (Q3-19: -43.7%). UNILEVER also recorded a net finance cost for the first time in twelve quarters. This was underpinned by a 94.6% decline in finance income, amidst the lower yield environment, and 624.5% increase in finance costs, as the company recorded higher losses on re-measurement of its foreign currency balances. However, with the help of a NGN492.00 million tax credit, the company reduced its post-tax loss by 48.2% y/y and 5.7% q/q.
Valuation: We raise our 2020E revenue growth and gross margin estimate to 2.4% (previously -4.7%) and 20.0% (previously 18.0%), respectively, on the strong topline and margin beat. However, we expect a greater net loss in 2020E on lingering FX pressures. Consequently, we lower our EPS estimate for 2020E to NGN0.47 (previously NGN0.34). The net impact of our changes in a slight increase in our TP to NGN10.46, from NGN10.10 previously and, thus, we retain our ‘SELL’ recommendation on the stock.