Please click the link “Unilever Nigeria Plc FY 2021 & Q1 2022 – Effective Route-to-Market Strategy and Strong Brand Reinvestment Deliver Remarkable Performance” to access our earnings report on Unilever Nigeria Plc.

Event

Coming out of the woods in recent years, the strategies implemented by Unilever (‘the Company) to create value to shareholders delivered results in FY 2021. These strategies include enhanced route-to-market, product innovation (in bid to make products affordable to consumers faced with shrinking income and purchasing power), and sales model tweak. The Company also completed the spin-off of its Tea business for improved operational efficiency.

As a result of the corporate action (i.e., tea business spin-off), the Company restated her financial figures, and classified the numbers related to the tea business as discontinued operations. Based on the restated figures for continuing operations in FY 2021, revenue grew by 35% YoY to N70.52bn. As noted above, improved route-to-market and product innovation supported volume growth. We also believe that higher pricing factored in the revenue growth, amid a rising cost environment.

Profitability improved, as gross margin expanded by 800 basis points to 29%. In absolute terms, gross profit grew by 84% YoY to N20.36bn in FY 2021. The Company’s bottomline (profit before tax) grew wider by 147% YoY to N2.06bn from a loss of N4.37bn in FY 2020. This was due to cost control measures to maximise profitability. For context, while gross margin expanded by 800 basis points, operating expense margin only expanded by 100 basis points. Furthermore, the Company incurred significantly less impairment charges (-78% YoY to N830mn in FY 2021 from N3.77bn in FY 2020).

ROE Still Below Historical Levels, But Records Strong Improvement in FY 2021

The Company’s return on equity (RoE) improved by 680 basis points to 1.13% in FY 2021. This figure is significantly lower than the Company’s 17% historical average RoE. However, it was a significant improvement from FY 2020’s figure and the highest over the past three years. Using DuPont Analysis to trace the source of growth, major improvements in asset turnover and net margin accounted for the ROE growth. On asset turnover, higher volume sales and market penetration delivered the performance while cost efficiency and improved scale accounted for the net margin expansion.

Dividend After a Two-Year Drought

Shareholders would welcome the decision of the Company to pay a N0.50 dividend for FY 2021. Although the dividend for FY 2021, based on current market price, comes at a 4% yield, investors might consider the dividend declaration as a positive development. That is, the corporate action could be regarded as a signal that the board is confident of future profitability. In the past two years, the board did not approve any dividend despite a strong cash balance. The qualification date for dividend was on April 14, 2022, while the payment date is on May 6, 2022.

Growth Trajectory Continues in FY 2022

Recently, the Company released her Q1 2022 financial results. The growth momentum sustained as revenue grew by 25% YoY to N20.56bn. Cost margin significantly declined by 1,000 basis points to 65% (Q1 2021: 75%). We attribute the cost margin decline to improved product mix and increasing returns to scale due to higher volumes sold (a result of a strong route-to-market and product innovation). We also posit that additional price increases were taken during the period.

Gross profit rose by 72% YoY to N7.17bn, while operating profit spiked by 859% YoY to N2.14bn. The material rise in operating margin was a result of operating efficiency. Operating expense margin declined by 200 basis points to 25% (Q1 2021: 27%). We note that this was in line with the Company’s strategy of a low-cost operation despite the inflationary environment.

Profit before tax grew by 1,908% YoY to N2.35bn from a loss of N130mn in Q1 2021. Similarly, profit after tax grew by 413% YoY to N1.79bn from a loss of N574mn in Q1 2021. Overall, the Company’s efforts in driving operating income, whilst managing costs simultaneously, were the value drivers in Q1 2022.

Outlook

We expect a N90.64bn revenue for FY 2022, which implies a 29% YoY revenue growth expected to be driven by a combination of higher prices and volume. On the back of cost optimisation and improved efficiency, we project a 7% net margin (FY 2021: 1%). Therefore, our earnings per share forecast for FY 2021 is N1.14. Using a blend of discounted cash flow, discounted dividend model, and enterprise valuation methodologies, we estimate a N14.24 fair value for the stock. At the current market price, the stock offers a 10% total return (inclusive of a 6% dividend yield).

Therefore, we posit that there is limited upside potential on the stock at the current market price. In our view, we think that it might be optimal to HOLD till when a price pullback occurs for a more attractive entry.

Please follow the link “Unilever Nigeria Plc FY 2021 & Q1 2022 – Effective Route-to-Market Strategy and Strong Brand Reinvestment Deliver Remarkable Performance”  to view the whole report.

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