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Unilever Nigeria Plc - Tougher operating environment: Will Unilever thrive?

• Unilever’s earnings for the first quarter of 2019 was rather disappointing, following decline in sales and pressure from input cost. For us, while we envisaged the poor sales outing in the home and personal care segment, the material decline in the food segment (-24% YoY) was rather surprising. To track back, sales in the food segment expanded by 19% YoY over 2018, with very little support from movement in prices. While the parent company attributed the drop in sales to trade disruptions related to election uncertainty (a claim we hope to substantiate when Nestle Plc releases its Q1 19 numbers), we believe new competition from smaller brands is starting to take up some of the company’s market share as our discussion with distributors revealed that ex-factory prices are unchanged during the review period. Coupled with input cost pressure, PAT dropped by 47.6% YoY to N1.5 billion (ARM Estimate: N2.6 billion).
• Intense Competition and cost pressure to drag earnings. Given the new business landscape, we cut our 2019 sales expectation and made upward adjustment to our cost estimate to reflect the pressures over Q1 19. On sales, while our views on HPC highlighted in our FY 18 report (See report: ) is unchanged, our understanding of the new competition in the food segment with “Top tea”, a competition to Lipton reducing its price this year, amongst smaller imported brands. Also, the entry of Gino max cubes, Mamador seasoning cube and DAN-Q cubes also gaining traction, we reduced our growth estimate in the food segment. That said, we expect overall sales to rise by 3.2% YoY to N95.9 billion (previously 7%). Elsewhere, we increased our cost to sales ratio to 72% to reflect the impact of higher raw material prices and higher currency sourcing cost, which guides contraction in margins over 2019 by 238bps YoY to 28%.
• Notwithstanding the moderation in operating expense over Q1 19 as the company relied on its brand equity which did not play out well over the period, we envisage new promotional offers in coming months in a bid to drive sales. That said, we leave our operating expense unchanged with OPEX to sales at 20%. The troika of slower growth in sales, increased raw materials cost and operating expenses drove the changes to our PAT estimate over 2019 to N8.5 billion (-7.3% YoY, previously: N11.6 billion) with related EPS at N1.47 (Previous: N2.01).
• Overall, we cut our FVE on Unilever by 13.8% to N35.82 (previously N41.56), which compared to current price translates to an OVERWEIGHT rating. UNILEVER trades at FY 19E P/E of 24.1x, compared to Bloomberg MENA peer average of 16.9x.