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Published On: Mon, May 8th, 2017

Company Analysis: Beyond Banks: Unilever shines again


Until recently the banking sector appeared to be the only game in town. Banks posted eye popping profits that promised dividend yields and great upward price momentum. The Nigerian Stock Exchanges All Share Index (ASI) was virtually a world defined by the vaults of Nigerians deposit money institutions; they were and remain investor’s darlings. But first quarter results of a few consumer goods companies (PCG’s) hitting the exchanges floor, the new global market order seems to be well on its way, or is it?

Unilever Nigeria Plc, once a troubled child of the PCG industry, appears to have turned a corner and remolded itself as it begins to brush up its books and attract growing investor interest. The company’s gross sales in Q1 2017 rose happily by 32.1 per cent from N16.8 billion in 2016 to N22.2billion in the contemporary period of 2017. Nevertheless the company still saw gross margins slip a scale or two as it slid from 35.9 per cent in Q1 2016 to 28.4 per cent in Q1 2017. The lower gross margin posted in 2017 still underscores the niggling cost push considerations that have ridden on the back of the falling external value of the naira.

To counter the effect of rising cost of raw materials and other fixed inputs Unilever’s management seems to have cut down heavily on certain items of its sales, general, and administrative expenses (SG&A’s). Even though sales and distribution costs scurried up 22.9 per cent, marketing and administrative costs were stripped down by 22.6 per cent from N3.4 billion in 2016 to N2.6 billion in 2017. The result has been a spritely 44.4 per cent rise in operating earnings from N1.9 billion in 2016 to N 2.8 billion in 2017. Particularly pleasing to investors is the fact that the company’s earnings per share (EPS) jumped smartly by 50 per cent from N0.28 in Q1 2016 to N0.42 in Q1 2017. So is this the time to break out the Champagne bottles and do a jig? No, not yet.

Trouble in bubble land

True, Unilever seems to have had a charmed first quarter in 2017, but there are still several dark spots that dog its performance. The company has been running on negative working capital year on year for the past two years.  In Q1 2016 the soap maker had a negative working capital of N11.97 billion by the end of March and in Q1 2017 the company still had to cope with tight working capital conditions as the business ended the quarter with a negative N10.2 billion in short term working assets. This translates into a liquidity crunch as the multi-product company negotiates fresh short term funding with bank creditors. The strains of business have already shown up in staggering rise in bank overdrafts which rose from none at the end of March 2016 to N3.5 billion in 2017. Admirably, however, to cushion the effect of narrow working capital on the company’s finances it has been able to convince its suppliers to extend further credit days thereby delaying cash outflows resulting in the company’s payables (or credit supplies) rising by 28.6 per cent from N32.5 billion in Q1 2016 to N41.8 billion in Q1 2017.



Five years ago the company had a tricky time keeping operations profitable. The company’s operating profit as a proportion of its turnover rose from 15 per cent in 2011 to 16 per cent in 2012 after which it caved in with margins sliding from 13 per cent in 2013 to collapse to 8 per cent in 2014, suggesting a major challenge with the company’s fixed and variable costs as well as sales charges. Trouble for the company was laid out all over its balance sheet.

Unilever’s sales, general and administrative expenses (SG&A’s) relative to its total annual revenue rose from 24 per cent in 2013 to 28 per cent in 2014 suggesting that the company’s fixed cost expense had spiked and its breakeven margins had been pulled up by a string of growing overheads. This compelled the detergent makers profit before tax figures to tumble year after year (sliding from N6.8 billion in 2013 to N2.9 billion in 2014 and down further to N18billion in 2015 before a reversal last year which so the company claw its way back up to a pre-tax profit of N4.1 billion), in other words Unilever had become less profitable and more vulnerable to operational inefficiency.

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Clearly, the company had seen its business come under some heavy gunfire as working capital took damaging hits with stocks of finished and intermediary products rising alarmingly, and non-cash sales soaring at a time supplier credit had begun to dry up. Working capital fell from   -N13.7b in 2015 to -N11.9b in 2016, representing a marginal but still negative year on year expansion of 33 per cent in working funds. This hinted at a rather tight liquidity situation (similar to recent conditions). The company’s ratio of current asset to current liabilities (an index of how much free cash the company has to meet its short term obligations) pegged off from 0.61 in 2015 to 0.78 in 2016 showing a higher capacity to cover short term payments but still fairly thin. Its interest coverage ratio, another index of how comfortably the company could pay financial creditors, also edged up one and a half times from a magnitude of 1.56 in 2015 to 2.4 in 2016 suggesting that the company faced easier times meeting bank obligations. Nevertheless, there are concerns that the company’s short term bank loan reliance could prove stubbornly difficult in months ahead if rates continue to rise on the back of the Central Bank of Nigeria’s (CBN’s) efforts at containing inflation (currently estimated at 17.8 per cent).

Looking through the Porter lens

A look at the company’s operations through a Porter (Michael Porter, Harvard University Business Professor) lens looks smooth with a few freckles. Unilever has a market presence with apparently strong supplier power; the company’s suppliers have a stronghold over their part of the production value chain and could cause some headache if they refuse to provide the required payable (credit) days needed to support the firm’s liquidity. However, between Q1 2016 and Q1 2017 the average payable days for credit were about six months (180 days in Q1 2016 and 190 days in Q1 2017). Suppliers do have heft with the company but they so far have been quite supportive.

Do buyers have the same competitive pull? Buyers of the company’s goods have moderate power. While most of the company’s goods have some form of substitute, the dominance of the CPG firm in the detergents (Sunlight and Omo) market weakens the power of buyers. The same could also be said of its mouthwash (Close up and Signal), food seasoning (Knorr and Royco), tea (Lipton) and its bread spread (Blue band). The demands for the dominant products are mildly inelastic as brand differentiation has effectively allowed the company influence price, if not the quantity of goods it sells.

High entry barriers to the CPG industry in Nigeria has helped Unilever operate within a market of a few sellers of a variety of specific household products (what economists call an oligopoly), thereby cushioning the adverse effect of the 2016 recession on its sales revenue. Nevertheless, stiff challenges do emerge from rivals in a number of product categories, particularly detergents where companies such as Procter and Gamble (P&G) play hard; or the food seasoning market where Nestle Nigeria Plc is equally a strong contender. Internal rivalry, however, falls short of the viciousness seen in other economies such as the United States and Europe. This explains why Unilever Nigeria is a lot more cheery today than its parent is abroad. However, even in Nigeria, the company still has a few niggling concerns.


Fuzzy liabilities?

Unilever seems to have chalked up problems on the asset and liability sides of its book. Sticky loans in Q1 show current loan and borrowing liabilities heave forward from N20.5 billion in 2016 to N21.5 billion in the comparable period of 2017 or what amounts to an upward shove of 5 per cent year on year. This tells a tale of deteriorating operating liquidity. Furthermore, and compounding the company’s borrowing woes, part of its non-recurrent liabilities saw loans and borrowings leap from N414.3 million in Q1 2016 to N444.7 million in Q1 2017 (a growth of 7.3 per cent). Surprisingly though, without clear notes explaining the difference between short term bank loans and advances and another item glibly referred to as ‘current borrowings’, few people know what the blazes the balance sheet item actually refers to. Should analysts, for example, include the borrowings in short term liabilities and add it to the company’s bank loans and overdrafts or should they simply flip them over to their longer term corporate loan obligations?

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Moreover, the company’s Q1 accounts mention a note 13 before it goes on to mention a note 12 with the note 12 referring to the company’s overdraft position, but lo and behold note 12 actually deals with the breakdown of the company’s cash and cash equivalents (which appears in an earlier line to the notes and is correctly referenced as note 12). Unilever’s sloppy book keeping is an analyst’s nightmare. Thankfully, however, the consumer goods maker has a robust times interest earned (TIE) ratio (a measure of how easily the company can pay its short term interest obligations from its ongoing operations) which was a muscular 3.6 times (meaning that the company’s earnings covered interest charges by roughly four times) in Q1 2016 and rose to 3.8 in Q1 2017, in other words, year on year earnings in the last two years have proved strong enough to meet the company’s finance charges; an impressive narrative for both the firm’s management and its stock holders.

Beyond investor excitement

Although investors continue to be excited by the stock (it has been in what has been called a ‘bullish’ channel over the last few weeks), its business antecedents still remain fairly precarious. At the end of the third quarter of 2016 the stock broke out of a straight (or ‘flag’) price band reflecting investor’s previous doubts about the stocks ability to pull off steeper profits. However, sustained upward price movements over the quarter suggest that investor’s attitudes are becoming sunnier, but why?

At N33.00 per share Unilever currently trades at 35.57 times its most recent earnings per share or simply put it would take an average investor 35.57 years to recover his or her investment in the company on the naira. Therefore, short of extreme optimism concerning mortality or perhaps some genetic link to Methuselah, an investor in today’s market would have to be either irrational or a moron to contemplate such a long wait. Nevertheless, in the short term the company has decently handled a worrying -9.11 per cent fall in capital value year on year by climbing bravely back up by 3.89 per cent year to date. Even the slight drop in market price at the beginning of 2017 has not dulled broad market enthusiasm for the stock at the end of the first quarter.

Indeed investors are smitten by the vast array of ‘fast moving’ consumer goods sold by the company ranging from household detergents to mouth wash, bathing soaps, and washing up liquids to cosmetics and a colourful portfolio of tea products. The company’s flotilla of goods has unhinged investor perspective of the company’s financial performance and latched on to the attraction of its oversized market presence.

This has proved clearly delightful for Unilever’s managers, but may leave several investors with the short end of the stick when the market wizens up to the respectable, even if modest, year end 2017 result and the market makes the necessary ‘corrections’ the last quarter; unfortunately, however, Unilever is not in the pharmaceutical business so it would not be in a position to provide the drugs needed to ease investors pains when their unbridled optimism meet major speed bumps.

But as an aside, the Nigerian subsidiary seems to be doing a lot better than its parent firm as the European behemoth recently narrowly escaped a proposed aggressive takeover bid by Kraft, the world’s largest food and beverages consortium. With the market for PCG’s becoming increasingly difficult in a time of global economic slowdown the outlook for UNILEVER appears counterintuitive but strong.






















Source: Teslim Shitta-Bey, Business Hallmark



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