Unilever Nigeria Shares Downgraded to Sell over Poor Performance
Equity analysts at CSL Stockbrokers Limited have advised investors to sell Unilever Nigeria Plc stock due to disappointing earnings. The company’s share was downgraded to sell following its loss-making position in the third quarter (Q3:2020) earnings season.
Unilever Nigeria in its recently released 9 months of 2020 financials reported a 13.4% year on year decline in revenue to ₦44.7 billion compared with ₦51.6 billion in 9M 2019.
With rising operating costs, the company declared a loss after tax of ₦2.1 billion following a ₦0.5 billion tax credit in the period.
Traded at ₦13.15 per share, analysts forecasted a price target of ₦8 for the company’s stock, which implies that the share price is overvalued.
Shareholders that follow this recommendation would be positive if perhaps the share falls further, but the bullish market run may actually upturn.
In its equity note, CSL Stockbrokers Limited observed that across product segments, performance was also weak as Food plunged 5.9% year on year to ₦25.1 billion and HPC segment revenue declined 21.3% to ₦19.6 billion.
On a quarterly comparison basis, analysts stated Unilever recorded a healthy recovery in revenue, up 24.2% from ₦14.0 billion in Q2 2020.
However, the quarter on quarter growth in revenue comes despite a decline in trade receivables (down 12.4% q/q) which signifies revenue growth was not reliant on credit growth.
“We think the company’s brands are beginning to regain some market share following observed price increases among competitors”, analysts at CSL Stockbrokers said.
In the equity note, the investment firm also noted that there was a year on year recovery in Q3:2020 as revenue jerked up 93.9% from ₦9.0 billion in Q3:2019.
Analysing segment performance in Q3:2020 alone, analysts said the performance was healthy as both Food and HPC businesses grew 84.8% year on year and 25.1% quarter on quarter and 107.3% and 23.0% quarter on quarter, respectively.
To give perspective, CSL Stockbrokers said Q3:2020 revenue is the highest since Q2:2019. Unilever Nigeria cost of sales as adjusted for depreciation declined faster than revenue. In particular, the reported cost of sales slowed down 18.1% year on year to ₦33.3 billion in 9M 2020 from ₦40.6 billion in 9M 2019.
However, on a quarter on quarter basis, the company cost of sales rose by 22.3%, much slower than the 24.2% quarterly revenue growth to ₦13.1 billion in Q3:2020 from ₦10.7 billion in Q2:2020.
CSL Stockbrokers Limited explained that the faster year on year decline in cost of sales relative to revenue reflects lower commodity costs. This happens to be the case despite pressure from the naira devaluation, which affected importing key raw materials.
Analysts expressed that as a result of the improved efficiency, Unilever Nigeria gross profit grew by 4.2% year on year to ₦11.5 billion in 9M 2020 from ₦11.0 billion in the comparable period in 2019.
In addition, the company’s gross margin expanded by 4.3 percentage points year on year to 25.6% in 9M:2020.
Despite the feat, CSL’ analysts hinted that Unilever Nigeria’s operating expenses as adjusted for depreciation remains a sticky point. In the period, operating expenses grew 16.0% year on year to ₦10.9 billion in 9M: 2020 from ₦9.4 billion in 9M 2019.
Analysts attributed the growth in operating expenses to sales-related activities amidst rising inflationary pressure in the country. The surge was largely driven by strong marketing and administrative expenses growth, up 28.2% year on year to ₦9.2 billion.
Compare with the level of revenue achieved, it thus means there was inefficiency around marketing activities or that administrative overheads were bloated.
Reflecting a lower sales result in the period, selling and distribution expenses dipped 24.8% year on year to ₦1.6 billion.
This could mean that goods were not picked up, then could not justify the amount spent on marketing and administration in the period.
In the period, Unilever Nigeria booked a significant 239.6% increase in impairment on receivables to ₦1.1 billion. As a result, the company booked a loss before interest, tax, depreciation and amortisation of ₦0.5 billion in 9M 2020 compared with an EBITDA of ₦1.3 billion in 9M 2019.
Placing further pressure, analysts stated that the company’s depreciation and amortisation grew by 14.1% in Q3 2020. Thus, operating loss expanded 261.2% year on year to ₦2.9 billion in 9M:2020 from ₦0.8 billion in the comparable period.
There is a mixed result around the company’s financing activities in the period, as net finance income declined, and cost moved in the same direction but at a different speed.
Net finance cost dropped 81.5% year on year to ₦0.3 billion in 9M:2020 from ₦1.4 billion in 9M 2019. CSL Stockbrokers said this was driven largely by a 69.7% decline in the company’s finance income to ₦0.6 billion.
On the other hand, finance expenses dropped by 32.1% year on year to ₦0.3 billion in 9M 2020 from ₦0.4 billion in 9M 2019.
Analysts said the decline in finance income was driven by lower fixed deposit investments (down by 44.5% year on year to ₦8.4 billion) as well as the depressed fixed income yield environment.
Following the reported lower net finance income, Unilever Nigeria hits a loss before tax of ₦2.6 billion in 9M:2020 compared with a pre-tax profit of ₦0.6 billion in the comparable period.
Unilever Nigeria however recorded a tax credit of ₦0.5 billion and as a result, loss after tax came to ₦2.1 billion compared with a net profit of ₦0.5 billion in the comparable period in 2019,
CSL Stockbrokers said, “We have a target price of ₦8.00/s with a SELL recommendation on the stock based on the current market price of ₦13.15”.
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Unilever Nigeria Shares Downgraded to Sell over Poor Performance
