Unilever Nigeria: Is the Company’s Stock worth Buying after Loss-making Streaks?

Unilever Nigeria: Is the Company’s Stock worth Buying after Loss-making Streaks?

A slew of bullish analysts at Chapel Hill Denham has rated Unilever Nigeria Plc stock a buy despite serial quarterly loss-making before the company return to profitability in the final quarter of 2020.

Despite its negative earnings, Unilever’s parent really ramped up about 210 million shares in 2020, raising its stake to more than 75% of the who enterprise value.

But, Chapel Hill Denham said more than 47% of purchases made was not reported to the Nigerian Stock Exchange, and it also shrink the company’s floating rate to 24.04% from 27.68% in 2019.

In its unaudited financial statement for 2020, Unilever Nigeria recorded a loss per share (LPS) of -N0.28 as against LPS of -N0.74 in 2019.

Though rated buy following a 12-month price target review to N21.36, it was noted that Unilever Nigeria result came behind the analysts’ earnings per share (EPS) forecast of N0.18.

In its equity report, Chapel Hill Denham explained that Unilever’s results showed a sustained recovery in fundamentals.

“This is in line with our expectations, with stellar operating results in Q4-2020 where it recorded its first quarterly profit after tax (PAT) since Q1-2020”, analysts stated.

Detail from the company’s unaudited financials indicates that in Q4-2020, Unilever Nigeria revenue significantly improved by 84.4% year on year to N16.84 billion.

This is coming after the relaxation of economic lockdown necessitated by the outbreak of coronavirus pandemic across the globe.

Few years back, Unilever Nigeria had market edge in Nigeria with wide array of products that meet household needs at competitive price.

Now, with declining purchasing power and strong rivalry in the consumers’ goods market following influx of cheaper alternatives, there have been pressure on demand.

On cost side, Unilever Nigeria is not finding it funny with Nigeria’s headline inflation rate rising faster, thus impacting both direct and indirect cost.

In 2020, Unilever Nigeria result shows that cost of sales fell by 7.1% year on year to N12.95 billion while profit after tax came in at N468 million.

“This marks Unilever Nigeria return to profitability when consider against the company’s reported Loss after Tax of -N4.76 billion in Q4-2019”, analysts said.

Explaining what Chapel Hill Denham like about the result, it said Unilever Nigeria revenue jumped of 84.4% year on year in Q4-2020 is in line with the firm’s expectations.

As a result, 2020 turnover increased to N61.57 billion as against Chapel Hill Denham’s forecast of N61.58 billion, translating to a variance of 1 basis point.

Based on the results, in Q4-2020, food segment sales rose by 41.0% to N9.61 billion and also increased by 8.8% to N34.71 billion on a year on year basis in 2020.

The breakdown of the company’s financials indicated that home and personal care (HPC) segment sales also showed a remarkable recovery in Q4-2020.

Specifically, HPC expanded by 85.6% in Q4-2020 to N7.23 billion, but declined by 6.9% on a 2020 basis to N26.87 billion.

“We believe the improved results were driven by volume growth in Q4-2020 as well as stronger cash-backed sales.

“Our channel checks also show that average retail price of Unilever’s portfolio has increased by 23.1% year on year, which equally underpinned the recovery in Q4-2020”, Chapel Hill Denham noted.

Meanwhile, analysts stated that the increase in retail was in line with trend across FMCGs in 2020, driven by value added tax increases and food scarcity.

Unilever Nigeria’s earnings before interest tax depreciation and amortisation (EBITDA) improved to N1.06 billion in 2020 as against negative N5.87 billion in 2019.

Chapel Hill Denham analysts however stated that the rebound was largely lifted by Q4-2020’s EBITDA of N1.5 billion.

Meanwhile, the improved EBITDA was equally supported by a decline in cost of sales by 11.6% year on year in 2020 to N47.79 billion, ahead of analysts forecast of N45.18 billion.

“While we link the lower costs of sales to lower activity, particularly in Q2-2020, we note that, on average, production cost is higher, due to the impact of FX devaluation on raw material costs”, analysts added.

On the company’s operating expenses, analysts at Chapel Hill Denham noted that the line declined by 1.1% year on year to N16.90 billion in 2020 and -38.2% to N4.11 billion in Q4-2020 specifically.

The decrease in operating expenses was attributed to marketing & administrative expenses, which fell by 1.7% in 2020 to N12.99 billion. Selling & distribution expenses also reduced by 10.5% to N2.28 billion.

Unilever Nigeria’s net operating cash flow was stronger in 2020, rising to N1.62 billion from negative position amount totaled N11.52 billion in 2019.

The improvement in net operating cash flow was noted to have been largely supported by a decline in trade & other payables to N19.98 billion, which indicates 1.3% growth in sales was cash-backed.

“Of the decline in trade & other receivables (-N3.07bn), we highlight that N1.08 billion is due to an impairment write-off by management.

“We also highlight that Unilever’s working capital in 2020 was pressured by a decrease in trade and other payables by 9.5% year on year to N31.42 billion, alongside an increase in inventory by 11.5% to N13.23 billion.

“We also note that net capital expenditure declined by 84.8% to N982 million, from N6.48 billion in 2019, which we believe is reflective of cash preservation by management”, Chapel Hill Denham highlighted.

In its equity note, analysts at Chapel Hill Denham said Unilever on the NSE was one of the worst performers in 2020; but analysts reiterate believe that a reversal is on the horizon.

Unilever (BUY, Price N13.20, TP: N21.36) is trading at FY-21E P/E and EV/EBITDA of 23.4x and 4.8x respectively, with the P/E ahead of our estimated consumer coverage of 8.2x, while the EV/EBITDA is behind our coverage average of 8.6x.

Over the last three years, Unilever Nigeria stock has consistently delivered negative price returns, declining by -36.8% year on year in 2020, -40.5% in 2019 and -9.8% in 2018.

“We think that the purveyor of investor’s apathy towards the counter is the uninspiring set of results especially between 2019 and 2020, when management tightened its credit policy, which crashed turnover significantly.

“However, we believe the company has cleaned up its books and re-initiated new trading terms with distributors to drive recovery.

“On the back of this, we see an opportunity for a strong upside in Unilever’s price over the coming months, particularly for investors seeking undervalued stocks on the NSE”.

Chapel Hill Denham hinted that at the current price of N13.20, Unilever is trading at a -80% variance from its 5 year high of N64.60.

Analysts said they are estimating a return to dividend payments in 2020, with a forecast dividend per share of 23kobo, which translates to a dividend yield of 1.7%.

This was considered to be higher than comparable Nigerian treasury bills (NTBs) rate.

In addition to this, Unilever has a well de-leveraged balance sheet, which implies that management has the headroom to raise debt in the market to drive growth opportunities.

Unilever Global has disclosed the separation of its Tea business; transaction is expected to be completed in FY-21E

Recalled that Unilever Global (listed on the London Stock Exchange and the Amsterdam Stock Exchange) in August 2020, disclosed strategically decision to divest from its Tea business, and rotate it to a standalone business and separate entity.

The company’s leading global Tea brands are Lipton, Brooke Bond and PG Tips (Lipton is a popular and the leading tea brand in Nigeria).

While management does not disclose the exact revenue from the Tea business in Nigeria, analysts said they estimate that it contributes about 15% to total food turnover.

In 2020, the food business had a turnover of N34.71 billion, thus Chapel Hill Denham’s estimate Tea turnover at N5.21 billion.

“Given this disclosure, we believe the sales of the Tea business is cash accretive for Unilever, although earnings dilutive.

“Using the recent disposal of the company’s margarine brand – Blue Band-, as a case study model, we expect Unilever to transfer ownership of Lipton to a new owner in 2021, but retain production at a fee to the new owner.

“We expect this transaction to be completed in 2021”.

Unilever’s parent purchased a total of about 210 million units of Unilever in 2020

Analysts at Chapel Hill Denham said while explaining ownership structure that in 2020, Unilever’s parent, bought a total of 209,647,176 units of Unilever on the Nigeria Stock Exchange.

“Of this number, only the purchase of about 111 million was disclosed on the NSE at an average price of N12.55 per share.

“These purchases, across three separate dates (10 August 2020, 14 August 2020 and 11 December 2020) amounted to total cash expenditure of N1.39 billion.

“On the back of this, Unilever’s total shareholding has increased by 5.05% to 4.36 billion units from 4.15 billion in 2019.

“This also implies that Unilever’s majority holding has increased to 75.96% as at 31 December 2020 from 72.32% in 2019, leading to the free float shrinking to 24.04% from 27.68% in 2019”, Chapel Hill Denham explained.

However, analysts said Unilever Nigeria Plc. as at 31 December, 2020 is still compliant with the free float requirement for the Main Board of the Nigerian Stock Exchange.

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Unilever Nigeria: Is the Company’s Stock worth Buying after Loss-making Streaks?