Unilever Nigeria: Analysts Upgrade Forecasts as Fundamentals Improved

Unilever Nigeria: Analysts Upgrade Forecasts as Fundamentals Improved

Unilever Nigeria Plc recovery in fundamentals has prompted analysts at Chapel Hill Denham to raise their forecast, and the stock price target for 2020.

Specifically, the investment firm upgrades Unilever Nigerian stock from “Hold” to “Buy” recommendation, cited improve operating outlook.

Analysts explained that the stock rating has been upgraded with the 12-month target price increased to ₦21.36 from ₦13.91 per share.

This implies a potential price return of 47.3% but analysts said they do not expect dividend payment in 2020.

However, there is an expectation that dividend payment will resume in 2021.

Meanwhile, analysts at Chapel Hill Denham raised Unilever Nigeria’s financial year 2020 turnover forecast to ₦61.58 billion from ₦57.03 billion.

“The upgrade in our forecast is necessitated by the impressive run-rate of revenue in 9M-2020, which implied a 2020 estimate of ₦59.64 billion, above our prior forecast of ₦57.03 billion”, the firm explained.

It said this, in addition to expected festive demand in Q4-2020 compels an upgrade from prior projection.

“While we have retained the expected growth in the food division at 5.7% year on year to ₦33.59 billion.

“We have revised the projected turnover of the HPC segment to ₦27.99 billion from ₦23.44 billion, representing a 2.5% year on year drop from ₦28.71 billion in 2019”, the firm stated.

Analysts at Chapel Hill Denham recall that Unilever’s management in H2-2019 implemented a credit tightening policy, halting credit sales in the process.

The firm views this as positive as sales over 9M-2020 have been cash backed, and accretive for Unilever’s Free Cash Flow.

In 2021, analysts at Chapel Hill Denham revealed expectation that turnover will advance by 10.5% year on year to ₦68.02 billion.

This is expected on the back of a 15.0% year on year (to ₦38.63bn) growth in the Unilever’s food business.

Analysts stated that the forecast, does not however, account for the likely separation of Unilever’s Tea business (Lipton Tea in Nigeria) as disclosed by Unilever’s global management.

For the company’s HPC category, Chapel Hill Denham estimates a 5.0% year on year growth in turnover to ₦29.39 billion in 2021 on sustained recovery in Unilever’s major HPC products – Sunlight, Omo, Vaseline, Rexona and Close-up Toothpaste.

The firm said it has also raised 2020 cost of sales forecast to ₦45.18 billion as against its previous estimate of ₦43.24 billion.

Read more: Unilever Nigeria Shares Downgraded to Sell over Poor Performance

Chapel Hill Denham expected earnings before interest tax depreciation and amortisation (EBITDA) at ₦4.45 billion from ₦3.09 billion.

“We expect cost of sales to decline by 18.9%, partly due to the relatively weaker production activity in Q2-2020”, analysts noted.

However, the firm revised cost of sales forecast implies a cost-to-sales ratio of 73.4% in 2020 compare with 92.1% in 2019 and 77.9% in 9M-2020.

It considers this higher than the Unilever’s historical average of 67.3% indicating cost pressures.

Analysts however detailed that Unilever Nigeria management had previously noted that the company faced procurement challenges.

This challenges was due to the impact of Covid-19 on global supply chains, coupled with scarcity of FX for importation.

In 2021, Chapel Hill Denham revealed expectation for cost of sales at ₦47.52 billion (+5.2% year on year), increasing behind the 10.5% projected growth in sales.

“We expect 2020 EBITDA at ₦4.45 billion compare to ₦3.09bn previously due to the supportive increase in 2020 turnover”, the firm stated.

In 2021, analysts said they expect EBITDA to further rise to ₦7.19 billion.

Meanwhile, profit after tax (PAT) is expected at ₦1.02 billion as against ₦977million previously estimated in 2020 and ₦3.31 billion in 2021.

2020 Free Cash Flow to Equity (FCFE) was revised higher to ₦8.33 billion from –₦7.54 billion deficit; and analysts expect this to remain positive at ₦8.87bn in 2021.

Analysts also increased 2020 net operating cash flow forecast to ₦10.18 billion from ₦9.05 billion, due to management’s progress at working capital management via the credit tightening policy.

Over 9M-2020, Unilever’s trade and other receivables has declined by 33.1% year on year.

On capital expenditure (CAPEX), analysts at Chapel Hill Denham reduced CAPEX intensity forecast to 4.0% in 2020 from 1.3% as at 9M-2020, but expect it at 5.0% in 2021.

This implies at net capex forecast of ₦2.46 billion in 2020, down by 62.0% year on year from ₦6.48 billion in 2019 and ₦3.40 billion in 2021 forecast.

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Unilever Nigeria: Analysts Upgrade Forecasts as Fundamentals Improved