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Analysts downgrade Unilever to SELL on weak margin, plunged market share

Unilever Nigeria Plc, a consumer goods company organised into foods products and home and personal is losing market share, profit due to stiff competition.

Turnover dropped-off 31% in the first quarter of 2020, profit margin slope downward while competition increases.

Analysts pointed at pressure indicators in its unaudited result as sales came weak despite a 109% increase in brand and marketing expenses.

At ₦11 per share, investors value the company at ₦63.195 billion on 5,745,005,417 shares outstanding.

WSTC Securities Limited downgraded Unilever shares to SELL as analysts pointed that investors is holding a share that is overvalued by about 90%.

The firm explained that the company is faced with demand pressure as it has lost sizeable market share.

This is coming despite the fact that the Nigeria’s borders were closed against influx of competing consumers’ products.

Unilever reported a turnover of ₦13.328 billion in Q1 2020 compare to ₦19.235 billion generated in Q1 2019.

Further analysis into the sales figure shows that domestic sales dropped from ₦19.070 billion in Q1 2019 to ₦12.374 billion in Q1 2020.

A sloppy sales pattern, as analysts dubbed it, signpost the firm’s expected weak performance down the year due to pressure from lockdown.

Analysts explained that Q1 has always been the firm’s peak period.

Equity analysts had predicted there will be significant improvement in consumers’ goods top and bottom line as substitute would be limited due to border closure.

But, boring sales trend  led to declining revenues feature in the consumers’ goods company, due to lower purchasing power and competition.

WSTC stated that the revenue relatively improved compared to the revenue reported in the previous two quarters average of ₦8.31 billion.

Unilever reported a material 35% decline in revenue from ₦92.89 billion in FY 2018 to ₦60.49 billion in FY 2019.

The material decline was attributed to stringent credit policies which saw its trade receivables decline by 20% in FY 2019.

Analysts at WSTC Securities explained that in earlier periods, it had established a trend of significant increases in trade receivables.

“This suggests that topline growth in those periods was majorly supported by credit sales”, analysts described.

Specifically, trade receivables grew by 87%, 46%, and 9% in FY 2016, FY 2017, and FY 2018, respectively.

During the same periods, revenue grew by 18%, 22%, and 9% in FY 2016, FY 2017, and FY 2018, respectively.

“Given that the 35% revenue decline in FY 2019, which was in the same trend with the 20% decline in trade receivable, Unilever is possibly faced with a problem of dwindling market share”, WSTC analysts explained.

Analysts attributed this to result of weak purchasing power of consumers and the redirection of consumers’ appetite and preferences towards other alternatives.

“Although revenue grew by 74% on a quarter-on-quarter basis, from ₦7.65 billion in Q4 2019 to ₦13.32 billion in Q1 2020.

“Yet, we remain unconvinced of a recovery, given that the Q1 is historically a strong quarter for the Unilever”, analysts remarked.

The year-on-year revenue decline in Q1 2020 was catalysed by the Home and Personal Care (HPC) business segment, which contributes half of the Group’s revenue.

Revenue from HPC declined by 41% from ₦9.98 billion in Q1 2019 to ₦5.92 billion in Q1 2020.

In the same trend, revenue from Food Products nosedived by 20% from ₦9.25 billion in Q1 2019 to ₦7.41 billion in Q1 2020.

Meanwhile, investment analysts recognised that lower cost of sales support margins in the period.

On a positive note, cost of sales declined at a faster rate of 36% from ₦15.37 billion in Q1 2019 to ₦9.90 billion in Q1 2020.

Then, cost margin came lower in Q1 2020 at 74% compare to 80% in Q1 2019.

This supported the increase in gross margin to 26% in Q1 2020 compare to 20% in Q1 2019.

Hemorrhaging Margins 

Analysts explained that 24% increase in operating expense from ₦2.38 billion in Q1 2019 to ₦2.95 billion in Q1 2020 eroded the cost savings made.

Specifically, selling and marketing distribution expenses surged by 53% from ₦1.52 billion to ₦2.33 billion year on year.

Breaking down the components of the marketing and administrative expenses, overhead costs rose by 100% from ₦656.01 million to ₦1.31 billion.

On the other hand, marketing and branding costs grew by 109% from ₦383.16 million to ₦800.65 million.

Consequent to the significant increase in operating expenses, operating profit dropped by 66% from ₦1.32 billion in Q1 2019 to ₦453.45 million in Q1 2020.

Strong Cash Position

Cash balance stood at ₦40.12 billion as of Q1 2020, a relatively stronger position from ₦35.46 billion from the beginning of the year.

The increase in cash position was buoyed by significantly lower credit sales of ₦214 million in Q1 2020.

This is in addition to an outstanding ₦3.11 billion payment yet to be made to creditors.

The amount of cash at disposal enabled the Unilever to earn an interest income of ₦495. 64 million in Q1 2020.

Meanwhile, this is albeit lower than ₦803.93 million recorded in the comparable period in 2019.

The lower interest income earned in Q1 2020 resulted from the low-yield environment.

Profit after tax declined by 27% from ₦1.52 billion to ₦1.11 billion year on year.

Notably, Unilever got a tax credit of ₦165.96 million in Q1 2020 while it incurred an income tax of ₦506.75 million in Q1 2019.

Analysts at WSTC Securities said they expect to see continued pressures on topline.

This expectation is owing to competition and subdued demand resulting from the impact of the coronavirus on purchasing power of consumers.

However, the investment firm posits that Unilever will make efforts to drive down costs to keep margins intact.

Then, analysts forecast a full year earnings per share (EPS) of ₦0.34 and a dividend per share of ₦0.10.

This implies an earnings yield and dividend yield of 3% and 1% respectively.

“We arrived at a fair value of ₦1.07 for the stock. We assert that the stock’s return on equity of 3% is significantly below its cost of equity of 19%”, WSTC stated.

At the current market price of ₦11.00, the stock trades at 89% premium to our fair value estimate. Hence, we recommend a SELL.

Analysts downgrade Unilever to SELL on weak margin, plunged market share by Julius Alagbe

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