MON, APRIL 23 2018-theG&BJournal-Last week, UNILEVER published Q1-18 result showing net profit grew by 81% y/y, 2% ahead of analysts’ estimate (and 21% ahead of consensus). Revenue came in better-than-expected, operating expense was well-contained, and finance cost (though higher than expected) was significantly lower, courtesy of the borrowings repaid last year. On the negative, however, gross margin was well-below expectation, after the positive surprises of the last three quarters of 2017FY.
Analysts at CORDROS Capital say the Q1 revenue growth of 16% y/y (+19% q/q) was ahead of the 10% estimated, but in line with consensus.
”There were price increases up until Q2-17, the impact of which we believe is somewhat reflected in the latest revenue. We should also reiterate the impact of volume on revenue, reflecting the campaigns and promotional activities that took place during the quarter (for Knoor Chicken seasoning and Close-Up toothpaste), increased activities of distributors following the slack in Q4-17, and introduction of new products, notably (from our routine checks), Sunlight bar soap and 70g and 25g Sunlight detergents. We raise 2018E revenue growth estimate to 13% (previously 7.5%), based on the (1) stronger-than-expected Q1 growth and (2) impact of the 5% increase in the price of Lipton tea implemented this month.”
Given the stability of both selling prices and the naira exchange rate during the period, the production costs, and consequently gross margin (72 bps y/y and 704 bps q/q to c.28%), may have been pressured by the rising price of petroleum products (which form key inputs in UNILEVER’s production process).
Notwithstanding the low outturn, we retain our gross margin estimate of 32% for 2018E. Recall that gross margin in Q1-17 (28%) was the lowest in all quarters of last year, before the improvement seen in the subsequent quarters
Total borrowings reduced to NGN457 million, from NGN674 million as at end-December 2017, with gross debt-to-equity now at 0.6%, vs. 191% a year ago. Cash remained strong at NGN47.5 billion, delivering interest income of NGN494 million (89% via bank deposits) that far exceeded the NGN130 million we estimated for the quarter.
Cordros Capital say they are maintaining their SELL recommendation but increase target price to NGN32.78 (previously NGN30.47) on slightly revised estimates. UNILEVER currently trades on FY18E P/E and EV/EBITDA multiples of 27.9x and 12.6x respectively.
