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UNILEVER NIGERIA PLC FY'19 Earnings Release - Topline to remain weak on receivables policy

Weaker revenue drags bottom-line.

Despite a relatively stronger operating environment in Q4, UNILEVER reported a dismal FY’19 performance, with Loss after tax of ₦4.2 billion, a sharp decline from the ₦10.0 billion PAT in FY’18. This represents the company’s first annual loss in thirteen years. Notably, the FMCG giant also reported a ₦4.7 billion Loss after tax in Q4’19, down from a ₦2.1 billion PAT in the corresponding period in 2018. We note that while UNILEVER started off the year on a mildly weaker note (topline and bottom line were down 11% y/y and 39% y/y respectively in H1), losses began in the second half following a decision by management to “prioritize tightening of credit terms and minimize exposures on trade receivables”. Simply put, management implemented aggressive measures to reduce its receivables balance. Consequently, trade receivables fell from ₦50.5 billion as at June 30 to ₦24.5 billion as at December 31, even as impairment on receivables worsened to
₦0.7 billion from ₦0.2 billion.

The new receivables policy adversely impacted topline in FY’19, with Revenue falling 35% y/y to ₦60.75 billion, affecting both Food (28% down)
and HPC (40% down) revenues. Furthermore, despite the improved operating environment for domestic producers in Q4 vis-à-vis the border
closure, topline still dropped 56% y/y in Q4’19 to ₦9.13 billion, with weaknesses in both food and HPC segments. While the weaker volumes also
dragged Cost of sales lower, Gross profit declined at a faster pace to ₦6.7 billion (FY’18: ₦27.4 billion) at a margin of 11% (FY’18:30%). Although the
results do not provide a breakdown of the costs, the weaker margins suggest a high fixed cost composition. After adjusting for largely static operating
expenses, UNILEVER reported an operating loss of ₦10.4 billion, down from a ₦10.0 billion operating profit.

Rocky road to recovery…

Still impacted by the tighter credit terms, we expect topline to remain pressured in the first half of the year before improving in H2’20. Overall, we forecast a 4.6% y/y growth in Revenue to ₦63.5 billion in 2020. This is driven by expectation of a modest performance from the food segment - still rife with competition - and slightly better performance from the HPC segment especially for the first half of the year, as the borders remain closed. Combined with a 9% projected moderation in cost of sales, as sales volumes remain low, we expect gross margins to increase to 18% in FY’20 from 11% in FY’19. Although we expect EBITDA margin to improve (+50 ppts) in FY’20, we foresee weaker Net Finance income (down 19% y/y to ₦1.64 billion) dampening this improvement. That said, we project a Loss after Tax of ₦0.14 billion in FY’20 still forecast that PAT will grow to ₦1.25 billion this year.