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Q3 2015 results review: No signs of recovery in the very near term

​No signs of recovery in the very near term

• Significant cuts to our earnings forecasts: Following Unilever Nigeria's (Unilever) Q3 2015 results which surprised negatively, we have cut our earnings forecasts for the 2015-16E period by an average of 64%. However, we have increased our price target slightly by 2% to N22.0 mainly because we have reduced our risk free rate assumption by 250bps to 13%. In addition, although the persistent macroeconomic challenges are likely to keep Unilever's performance subdued in the very near term, beyond 2017, we believe the company's performance will normalise and we expect to see signs of improvement. Year to date, Unilever shares have gained 1.6%. However, since the end of Q2, following the completion of the tender offer transaction by Unilever's parent company at a price of N45, the shares have shed around 20% (ASI: 16%). Despite the recent sell-off, we still find the shares expensive. From current levels, we see downside potential of -39.4% to our N22.0 price target. We have maintained our Underperform rating on the stock.

• Extremely weak set of Q3 2015 numbers: Q3 2015 results showed that sales of N14.0bn were down -2.6% y/y while PBT and PAT were down -86.7% y/y and -90.2% y/y respectively. Although opex declined -10% y/y, this was not strong enough to offset a -354bp y/y gross margin contraction and a 44% y/y rise in finance costs. These led to the significant y/y decline in PBT. PAT fell by a wider margin, owing to a higher tax rate of 48% versus a tax rate of 24% in Q3 2014. Sequentially, while sales were flattish q/q, PBT and PAT of N107m and N55m respectively compare with losses of –N771m and –N505m reported in the preceding quarter.

• Opex weighed on Q3 earnings: Unilever's Q3 2015 sales came in 6% behind our estimates, while PBT and PAT missed by an average of 89%. Although the company managed to curb its operating expenses y/y, we expected to see a more significant reduction on this line. This was the main reason for the variance in the Q3 numbers vs our estimates. Given the elevated opex, we see a 90% y/y decline in EPS in 2015E despite the fact that we have modeled flattish sales. Beyond 2015, we see modest topline growth of around 3.5% y/y for the next two years and EPS growth of 121% y/y on average over the same period, mainly due to base effects.