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UNILEVER NIGERIA PLC - Unrelenting cost pressure subdues Q3 earnings

UNILEVER released 9M’16 financial results showing a 17% y/y rise in topline, outperforming Vetiva’s 10% y/y growth estimate, following an unexpected 14% q/q increase in Q3 revenue. We are compelled to attribute this topline growth to price increases in the quarter given that the three-month period (July – September) historically records a quarterly slowdown across most Consumer Goods companies. Looking at the segmental breakdown, growth was recorded across all operating divisions (Food, Home and Personal Care) following the price hike – notably, the Personal Care segment recorded its first quarterly revenue growth this year. We believe volume performance would have been tepid in the quarter, particularly in the highly competitive Personal Care segment. However, given the resilience of its market leading OMO brand, volumes in the Home Care segment may not have suffered as much. From a geographic perspective, UNILEVER has managed to record an 80% y/y growth in export revenue as at 9M’16, now accounting for 5% of total revenue (9M’15: 3%). We believe export volumes have reacted positively to the c.58% ytd depreciation in the currency.

Supported by price increases and slight improvement in domestic volumes in the coming festive season, we believe this topline run rate will be sustained, sealing the year with a ₦17.4 billion revenue in Q4’16. With this, our turnover forecast for FY’16 is revised to ₦67 billion (Previous: ₦62 billion), implying a 14% y/y growth. However, we are not convinced UNILEVER will be able to effectively offset the effect of the weak currency on its costs through further price increase and therefore revise our FY’16 and FY’17 cost of sales estimates to 71% and 69% respectively (Previous: 67%). Nonetheless, given the topline growth, reduced OPEX to sales and better than expected Q3 PAT (following the tax credit), we revise our FY’16 net earnings forecast to ₦1.9 billion. With a 20% payout ratio, we estimate a ₦0.10 dividend per share for FY’16. Our 12-month target price is revised slightly lower to ₦14.79 (Previous: ₦15.38).