…as investment firm downgrades stock to SELL on weak margin


The fortunes of the once blue-chip conglomerate / multinational corporation, Unilever Plc, may seem to have reached a point of no return. Even before the current global and national economic downturn caused by the Coronavirus pandemic, the future of this great manufacturing giant had been a subject of anxiety and speculations. Its performance in the past few years has followed the same consistent southward trajectory.

Unilever a consumer goods company which is organised into foods products and home and personal is facing steep competition from cheap imported brands as well as local upstarts that enjoy cost and price advantage. Against the fact that the Federal Government had closed the nation’s borders, which stemmed the influx of imports, analysts had predicted a strong uptick performance for consumers’ goods sector. Unfortunately, Unilever was unable to take advantage as performance plunged.

BusinessHallmark analysts’ review observed that turnover dropped-off 31% in the first quarter of 2020, with profit margin sloping downward while cost increased. 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. Research equity analysts at WSTC Securities Limited thus downgraded the company’s shares to SELL as they pointed out that investors are holding a share that is overvalued by about 90%. The Securities firm explained that the company is faced with demand pressure as it has lost sizeable market share.

This is coming although Nigeria’s borders were closed against the influx of competing consumers’ products. Unilever reported a turnover of ₦13.328 billion in Q1 2020 to compare to ₦19.235 billion generated in Q1 2019. Further analysis into the sales figure showed 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, signposts 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 a significant improvement in consumers’ goods top and bottom line as a close substitute would be unavailable.

But, boring sales trend which led to declining revenues feature in the consumers’ goods company, perhaps was due to lower purchasing power. WSTC Securities stated that the revenue relatively improved compared to the revenue reported in the previous two-quarters average of ₦8.31billion. Unilever reported a material 35% decline in revenue from ₦92.89billion in FY 2018 to ₦60.49billion 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 top-line 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 the result of the 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 ₦7.65billion in Q4 2019 to ₦13.32billion in Q1 2020, cost of operations outpaced it.

“Therefore, we remain unconvinced of 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. However, revenue from HPC, which is the cash cow, declined by 41% from ₦9.98billion in Q1 2019 to ₦5.92billion in Q1 2020.

In the same trend, revenue from Food Products nosedived by 20% from ₦9.25billion in Q1 2019 to ₦7.41billion 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 ₦15.37billion in Q1 2019 to ₦9.90billion in Q1 2020.

Therefore, cost margin was lower in Q1 2020 at 74% compared to 80% hit in Q1 2019, thus supporting the increase in gross margin to 26% in Q1 2020 against 20% in Q1 2019.

Haemorrhaging Margins on the back of High Expenses

Analysts explained that 24% increase in operating expense from ₦2.38billion in Q1 2019 to ₦2.95billion in Q1 2020 eroded the cost savings made. Specifically, selling and marketing distribution expenses surged by 53% from ₦1.52billion to ₦2.33billion year on year.

Breaking down the components of the marketing and administrative expenses, overhead costs rose by 100% from ₦656.01million to ₦1.31 billion. On the other hand, marketing and branding costs grew by 109% from ₦383.16million to ₦800.65 million.

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

Strong Cash Position Yield Earnings

The Company’s cash balance stood at ₦40.12billion as of Q1 2020, a relatively stronger position from ₦35.46billion from the beginning of the year. The increase in cash position was buoyed by significantly lower credit sales of ₦214 million in Q1 2020, as well as an outstanding ₦3.11billion payment yet to be made to creditors.

The amount of cash at disposal enabled Unilever to earn an interest income of ₦495.64 million in Q1 2020, which was lower than ₦803.93million in Q1 2019. The lower interest income earned in Q1 2020 resulted from the low-yield environment. Profit after tax declined by 27% from ₦1.52billion to ₦1.11billion year on year. Notably, the Company got a tax credit of ₦165.96mn in Q1’20 while it incurred an income tax of ₦506.75mn in Q1’19.

WSTC Securities noted that it expects to see continued pressures on top-line, owing to competition and subdued demand resulting from the impact of the coronavirus on the 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 full-year earnings per share (EPS) of ₦0.34 and a dividend per share of ₦0.10. This implies an earnings yield and a 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.