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Unilever Nigeria Plc - Dilution recaps stretched valuation

Dilution recaps stretched valuation

• Unilever Nigeria (Unilever) sustained earnings recovery in its full year 2017 results with a record after-tax earnings of N7.5 billion, representing a 142.5% YoY increase from the prior year and translating to EPS of N1.78 (FY 16: N0.81; FY 15: N0.32). In terms of earnings driver, higher revenue (+30.1% YoY to N90.8 billion) was the major driver, which more than offset input cost pressures to drive a 280bps expansion in gross margin to 32%. Q4 17 standalone performance was also positive as EPS rose 36% to N0.50 underpinned by sizeable increase in operating profit (+46.5% to N3.5 billion) reflecting higher revenue, and finance income (+17.7% to N1.0 billion).
• Going forward, higher petrochemical prices from the sustained rise in crude oil price remains a key factor to Unilever’s earnings even as we expect Crude Palm Oil (CPO) to moderate in 2018. Nonetheless, expected increase in revenue from a mix of price and volume as well as an expected rise in finance income should offset these pressures which drive our expectation for earnings to rise 57.5% YoY to N11.7 billion. However, due to the dilutive impact of the additional shares (1.96 billion ordinary shares) from the rights issue in Q3, our EPS forecast of N2.04 represents a 14.6% YoY increase from FY 17.
• Unilever Nigeria has gained +34.2% Year-to-Date (YTD), stronger than the return on the personal care segment (+30.1% YTD) and NGSE All Share Index (+8.5% YTD). On our 2018 numbers, Unilever trades at a P/E of 26.9x relative to Bloomberg Middle-East and Africa (MENA) peers of 28.6x. We retain our SELL rating on the stock with our FVE estimate of N33.56.