Event

Unilever Nigeria Plc (‘the Company’) reported an underwhelming financial performance in Q3 2022, away from the trend in the previous quarters. Although revenue grew by 22% on a year-on-year basis to N20.96bn, it declined by 10% on a quarter-on-quarter basis. We think that weak demand amid macroeconomic bottlenecks (particularly shrinking household purchasing power) resulted in weak demand for the Company’s products in Q3 2022 relative to Q2 2022. However, price adjustments done in the previous quarters supported the year-on-year growth.

Outlook

We maintain a SELL recommendation for the stock. The near-term outlook for Unilever is bleak, and we link it to possible loss of market share, weakening moat, and overall macroeconomic vulnerabilities. On the positive side, the Company’s balance sheet is strong. The Company closed 9M 2022 with a N122.41bn total assets, with cash accounting for 50% of total assets and 98% of net assets.

We view the cash-rich balance sheet in two forms. The first form is that the strength of the balance sheet equips the Company to invest in growth in the long term. However, an investment for growth would only be optimal when the market fundamentals are good (i.e., when there is a growing effective demand). Unfortunately, the Nigerian economy has shown severe underlying weaknesses over the past few years which has hindered major corporates from crystalising returns on their investments. We expect macroeconomic vulnerabilities to be present in the near term. Therefore, it could take a bit longer for concrete growth investments to happen.

On the other hand, a large chunk of cash balance without being utilized may suggest inefficiency. While the possible reason for the non-utilization is understood, we believe that there is an opportunity cost.

Based on our weak outlook, we estimate a fair value of N8.57, which is a downgrade from our previous target price of N13.38. Relative to the current market price, we estimate a 14% total downside for the stock. We no longer expect the Company to declare dividend in FY 2022 due to our expectations for weak earnings by the end of the year. All in, we recommend a SELL.

Please follow the link “Unilever Nigeria Plc Q3 2022 – Significant High-Cost Sweeps Profit” to view the whole report.

Thank you.