EUR 4.00 For Business Accounts Only

Unilever Nigeria & PZ Cussons Nigeria - More positive on Unilever

• In this report, we update our views on PZ and Unilever, making adjustment to our cost of sales to reflect expectation of lower petrochemical prices over 2019. Also, we changed our risk-free rate assumption to 15% (previously 14%) – reflecting the average 6-month yield on the generic 10-year bond yield. Having factored these changes in our model, we have a BUY rating on Unilever with a FVE of N49.19. On PZ however, we retain our SELL rating with FVE of N10.93.
• Competition to hamper topline growth: Over 2019, competition from imported goods is still expected to constrain revenue growth for sector players, as the relative stability in the foreign exchange market and FX accessibility continues to provide incentive for importers. We therefore expect revenue for PZ to decline by 4.8% over FY 19 to N76.7 billion. To buttress, PZ’s products are not particularly key leaders in their segment. Beyond 2019, we expect gradual improvement in revenue. On Unilever however, we expect support from the food business to drive a revenue growth of 11.4% YoY to N111.0 billion over 2019, given its resilience over the last two years, having maintained a double-digit growth.
• On cost, our expectation of lower global crude oil prices over 2019 guides to lower petrochemical prices coupled with the CPO market remaining in a glut for most part of the year, we expect lower input cost over 2019. That said, we expect gross margin for Unilever to expand by 134bps to 32.8%. For PZ however, given the higher petrochemical prices reported in the first half of its financial year which compressed gross margin over the period. With the relative lower petrochemical prices over the second half, we see slight improvement in margin, which will moderate the rate of compression over full year 2019. We therefore expect gross margin to print at 26.7% - down by 366bps.
• Overall in the sector, we prefer Unilever as the foregoing coupled with its significant cash balance worth N46.8 billion forms our earnings estimate of N13.3 billion – up by 9.5% YoY and brings the EPS to N2.31. On PZ, while the operating performance would still remain weak – support from lower FX loss would drive earnings higher by 9.6% YoY to N2.0 billion with EPS of N0.51. That said, we have a fair value estimate of N49.19 on Unilever, implying a 34.6% upside from current market price, which translates to a BUY rating on the stock. On our numbers, Unilever trades at a P/E of 17.6x, which is a discount when compared to its Bloomberg MENA peer average of 19.6x. On PZ however, we have a SELL rating with FVE of N10.93.  On our numbers, PZ trades at a P/E of 42.9x, which is a premium when compared to its Bloomberg MENA peer average of 32.2x.