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UNILEVER NIGERIA PLC FY'16 - Strong Q4’16 margins drive earnings beat

UNILEVER’s Q4’16 results revealed a better than expected performance as PAT rose to ₦1.5 billion (Vetiva: ₦79 million, Q3’15: ₦388 million). Revenue for the seasonally stronger quarter rose 13% q/q to ₦19.9 billion, 4% higher than Vetiva estimate. The strong top line performance was majorly driven by robust growth in the Home Care segment – up 35% q/q. More importantly, EBIT margin rose to the highest level since Q4’13, up 812bps q/q to 13.5%. The margin improvement was driven by continued cost cutting benefits (OPEX to Sales ratio moderated 418bps q/q) and a ₦622 million foreign exchange gain recorded in the quarter. Overall, Q4’16 PAT margin came in at 7.6% trumping Q3’16 margin of 2.2%. With revenue growth primarily driven by higher pricing across most product categories, FY’16 revenue was up 18% y/y to ₦69.8 billion, in line with Vetiva estimate. Whilst gross margin for the year contracted 645bps y/y as a result of the impact of currency weakness (UNILEVER imports 62% of its inputs), we note the improvement in EBIT margin (FY’16: 8.3% vs. FY’15:7.8%). Consequently, PAT rose 158% y/y to ₦3.07 billion - beating Consensus estimate of ₦1.7 billion. The Board of Directors proposed FY’16 dividend of ₦0.10/share (FY’15: ₦0.05) – translating to a dividend yield of 0.3%.

 

We recall that in Q3’16, UNILEVER paid down its relatively expensive local borrowing and secured an intercompany loan facility of $59.7 million (₦18.8 billion) priced at 6.45% plus 3 month US LIBOR (drawn down ₦14.98 billion as at FY’16). We understand that the facility was obtained for the purpose of clearing backlog of unpaid obligations to suppliers. Whilst we expect this to continue to ease the company’s FCY working capital needs, we note the currency risk exposure amidst unabated concerns of a possible devaluation. Whilst we maintain our revenue growth forecast of 7% to ₦74.9 billion for FY’17 with the Food segment at the forefront with a 10% growth, we take a slightly optimistic stance on FY’17 costs and estimate Cost of Sales (as a % of sales) of 70% (FY’16: 71%). Having adjusted for lower operating expenses, our FY’16 EPS estimate is revised higher to ₦0.88 (Previous: ₦0.59, FY’16: ₦0.81). Our 12-month target price is revised higher to ₦20.12.