Analysts at Cordros Securities Limited have said their outlook on Unilever Plc, one of Nigeria’s leading conglomerates, is cautious in the near term.
The pessimism on the performance of the price of the stock according to stock market analysts is mainly due to the increasing price competition in the home and personal care (HPC) segments from listed and unlisted brands amid the tight consumer wallet.
“Although we like that management intends to focus on the mass mainstream segment to appease price-sensitive consumers, we highlight that UNILEVER’s high exposure to FX risk remains a key downside risk. For clarity, we note that UNILEVER imports c. 50.0% of its raw materials,” Cordros said in a report.
Cordros further disclosed that, “We expect the food segment to still account for a lower share of revenue, especially as the tea business is fully exited; nonetheless, we still see scope for growth on the back of sub-inflationary price increases. Overall, we expect the company to maintain positive earnings in 2022E, underpinned mainly by double-digit topline growth. With a revised target price of N12.63, we retain our “HOLD” recommendation on the stock.”
Unilever Plc reported revenue growth of 35.1 percent y/y in the financial year ended 2021, primarily driven by the company’s HPC (+47.1% y/y) segment, while the Food (-10.6% y/y) segment declined. It is believed that the topline growth was supported by higher volumes from its tier 4 products (launched in 2020), increased investment in its distribution network and marginal price increases in some core products.
In addition, support to topline growth from increased credit sales to distributors as management loosened its tight credit policy. Pertinently, the HPC (56.0%; 2020FY: 43.6%) segment’s contribution to revenue increased, while that of the Food (44.0%; 2020FY: 56.0%) segment declined.
The discontinuation of UNILEVER’s tea business, which previously contributed c. 14.0% to the Food sales outturn impacted on the performance. Meanwhile, the impressive topline growth offset cost pressures and drove profitability. Consequently, EPS turned positive at N0.59 (including gains from the tea business disposal) compared to the loss per share of N0.65 in 2020FY. Adjusting EPS for the disposal gains, EPS outturn was still positive, albeit lower at N0.12.
For 2022E, Analysts said management’s strategy to focus on the mass mainstream segments by reinvesting heavily in its tier 3 and 4 brands with lower prices bode well for volume expansion in the HPC segment will boost revenue.
“Thus, we forecast revenue will grow by 6.3% in 2022E. Further out, we estimate revenue CAGR of 5.5% over 2022 – 2026E. Although management stated its intention to source raw materials locally to abate its FX losses, we do not expect a material impact on earnings in the near term. Thus, we model a 55bps decline in the 2022E gross margin, reflecting the impact of elevated cost pressures. Nonetheless, we forecast a 97bps increase in EBITDA margin to 7.6%, as we estimate a lower OPEX-to-sales ratio (2022E: 26.1% | 2021FY: 27.3%).”
Overall, Cordros estimates that EPS will decrease by 55.5 percent y/y to N0.26 in 2022E. Adjusting 2021FY EPS for the disposal gains (adj EPS: N0.12), we estimate 2022E EPS will grow by 116.7 percent
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