Unilever Nigeria Plc - Is Unilever topping out?
- Unilever Nigeria Plc (Unilever) began the 2018 financial year positive reporting impressive EPS of N50 (+19.1% YoY) which was largely in line with our expectation (ARM forecast: N0.49). Broadly, earnings growth reflected volume-led revenue growth (+16.4% YoY to N25.8 billion) and lower operating expenses to sales ratio (-199bps to 14%) which offset higher cost of sales (+17.6% YoY to N18.7 billion) – a reflection of higher petrochemical prices, in our view.
- Going forward, we retain our view that higher petrochemical prices from the sustained rise in Brent price would pose downside risk to Unilever’s core earnings. Nevertheless, we see higher finance income and tamer finance expense providing support for earnings and forecast FY 18E after-tax earnings to rise 58.7% YoY to N8 billion. However, due to the dilutive impact of the additional shares (1.96 billion ordinary shares) from the rights issue in Q3, our EPS translates to N2.06 which represents a 15.4% YoY increase from FY 17.
- From all indications, Unilever Nigeria is poised for further earnings recovery in FY 18. However, from a valuation standpoint, we believe the stock is expensive with the company trading at a forward P/E of 25.8x vs. 18.9x average for MENA peers. Additionally, on our FY 18 earnings, we expect 2018 ROE to print at 13%, lower than 27% average in the last 5 years which speaks to the idle cash – from the rights issue – on its books that is yet to translate to substantial improvement in earnings. Hence, with our FVE of N30, we retain our SELL rating on the stock.
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ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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