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UNILEVER NIGERIA PLC - Margin improvement spurs impressive H1’17

Margin improvement spurs impressive H1’17
Beating our 31% y/y revenue growth expectation, UNILEVER released its Q2'17 financial results showing an impressive 48% y/y growth in revenue. With the Q2’17 top line coming in at ₦23 billion, revenue for H1’17 came to ₦45 billion, 6% ahead of our estimate. Whilst the price increases taken earlier this year continue to support y/y growth, we believe volume must have been stronger q/q as the company bucked the historically weaker Q2 trend to post an 8% q/q rise in revenue. Looking at the Q2'17 result, the company recorded notable improvement on production and operating costs. However, finance expenses rose 17% q/q to ₦775 million in Q2'17 (Vetiva: ₦475 million; Q2’16: ₦186 million). Despite the interest cost pressure, PAT for Q2'17 came to ₦2 billion (Vetiva: ₦1.3 billion), a major improvement from the low base in Q2'16 where a surge in production and operating costs constrained PAT to ₦52 million. Coupled with the outperformance recorded in Q1'17, H1'17 PAT rose 236% y/y to ₦3.7 billion.

As we are more optimistic for topline growth through the year (particularly in the HPC segment), we revise our revenue growth figure higher to ₦88.8 billion - implying 27% y/y growth (Previous: 12%). We also revise our margin estimates slightly higher to reflect the consistent cost efficiency from the HPC leader. Whilst UNILEVER recently obtained regulators’ approval for a ₦58 billion rights offering aimed at repaying its outstanding liabilities, we are yet to include this in our valuations as we await the eventual outcome of the process. Thus, we expect finance expenses to remain the major earnings dampener in the near term – pending the completion of the rights issue. Nonetheless, with a strong boost from revenue and better margins, we revise our FY'17 PAT estimate from ₦5.1 billion to ₦6.9 billion. We also upgrade our 12-month Target Price to ₦25.01 (Previous: ₦22.52).