Unilever Nigeria Plc Stock Valuation

UNILEVER NIGERIA PLC

Ticker:                          UNILEVERNature of Business:      Personal/Household ProductsLocation :                              Nigeria
Recent Price:           NGN13.00    52-Week High/Low: NGN15.75/11.20Estimated Fair Value:  NGN11.66-NGN15.80
Expected Return:    26%Consider Buy:                     Below NGN13.73Business Risk:            Average
Financial Risk:      AverageEconomic Moat:                  WeakCorporate Governance: Strong

Company Overview
Unilever Nigeria Plc (UNILEVER), a subsidiary of Unilever Overseas Holdings B.V Holland, is a prominent maker of food, personal and household products such as OMO, Close Up, Lipton Yellow Label Tea, Vaseline, Lux, Pears, Royco and Knorr. Home and personal care products accounted for 45% of revenue (2019; 47.5%) while food products contributed 55% of revenue (2019:52.5%).

UNILEVER is one of the oldest and resilient companies in Nigeria. Its birth dates back to April 11, 1923 when Lord Leverhulme established Lever Brothers (West Africa) Limited as a soap manufacturing company. It was listed on the Nigerian Stock Exchange in 1973. Lever Brothers metamorphosed into Unilever Nigeria Plc in 2001. Unilever Group has decided to separate its global tea business. Unilever Nigeria Plc is a member of the group which has its headquarters in the United Kingdom. Consequently, Unilever Nigeria Plc’s tea business will be transferred to a newly-established company.

The board of directors has enough capability to steer the affairs of the company. His Majesty N.A. Achebe (Obi of Onitsha) is the chairman of the board. Mr. Jaime Aguilera (Spanish) and Mr. Michael Ikpoki joined as non-executive directors in 2021 while Mr. Peterside Atedo resigned on 31st March 2020. The management team is headed by Mr. Carl Cruz (Filipino), who was appointed managing director on 1st February 2020. Mr. Carl had served in Unilever Asia for about three decades. He was the immediate past executive chairman of Unilever Sri Lanka.

Investment Thesis
UNILEVER is a model of resiliency. It is one of the few companies that are still around after over ninety years of existence. Revenue has grown at a Compound Annual Growth Rate (CAGR) of 4.3% over the past twelve years. The company had enjoyed twelve years of uninterrupted profits. And shareholders have been adequately compensated with adequate dividend payout. However, there was a setback in 2019 and 2020 as the company made losses. We believe that UNILEVER will bounce back. The company is being refocused and we expect management’s efforts to bear fruit. Some assets/facilities have been disposed of. For instance, its spreads business (Blueband margarine) was sold in 2018. It has put up part of its Home and Personal care manufacturing facility for sale. A tea company is also being spun off from the company. These moves should lead to operational efficiency and reduced costs.

Product innovation and promotion have helped reinforce its brands. UNILEVER spent NGN3.2 billion on brand and marketing in the year under review as compared to the previous year’s NGN3.1 billion. Capital expenditure was NGN1 billion (2019: NGN6.5 billion); this was tantamount to capital spending per share of NGN0.28 (2019:NGN1.72). We expect the continuous capital expenditure to pay off in the nearest future.

The company was authorised by Unilever UK Plc, its ultimate parent company, to produce and market its international brands like Lipton, OMO, Lux and Knorr. In addition, UNILEVER enjoys managerial and information technology support of Unilever Europe Business Centre B.V.

The ability to develop products of different sizes to appeal to all income groups remains an effective strategy. But total impairment loss which stood at NGN3.8 billion at the end of 2020 was a far cry from previous years’ figures (2019:NGN200 million; 2018:NGN311.4 million). Operating profit suffered on account of that.  This may not be unconnected to COVID-19 with its effects on incomes and business activities. Better credit management should reduce the likelihood of occurrence in the future.

UNILEVER’s debt has been reduced significantly. It had no outstanding long-term debt as at 31st December 2020; short-term debt was NGN239.4 million. Total debt was less than 1% of both total assets and shareholders’ fund.

Valuation
A share of UNILEVER is estimated between NGN11.66 and NGN15.80. Investors should expect a return of 26% on UNILEVER stock.  Our recommendation is a buy.

Financial Overview
UNILEVER has been growing revenue in the past sixteen years except in 2006, 2014 and 2019. Revenue of NGN62 billion in the year 2020 was equivalent to a year-over-year increase of 2.4% over the previous year in which revenue was NGN60.5. The dip in revenue was due to a 3% drop in home and personal care products sales. Food products sales appreciated 7.3% year-over-year to NGN34.1 billion from NGN31.8 billion. Besides, food products accounted for 55.1% of total revenue, up from 52.5% of the prior year. On the other hand, home and personal care products’ share of total revenue declined by 2.5% from 47.5% of the year before (2019).

Cost of sales shed 11.8% as a lesser amount was spent on raw materials due to COVID-19 restrictions and scarcity of foreign currencies for importation. UNILEVER expended NGN36.5 billion on raw materials and consumables in 2020 compared to NGN41.3 billion incurred a year before. As a result, gross profit was almost tripled in a year. However, the gross profit of NGN12.8 billion is far less than its 10-year average of NGN19.9 billion.

 The company could not make any operating profit even though gross profit snowballed. Operating loss was NGN6.1 billion in the 2020 fiscal year, better than the NGN11.8 billion loss of a year ago. Huge total expenses have hurt profits over the years.  Both loss before tax and loss after tax were NGN4.6 billion and NGN4 billion respectively.

Earnings Per Share (EPS) which had grown at a 7-Year CAGR of 10% to NGN2.82 in 2018, turned negative in both 2019 and 2020 as a result of two straight years of losses. Return on Equity (RoE) was -7.2% while Return on Assets was -4.9%. Though shareholders were not paid any dividend in 2020, the dividend yield averaged 2.6%. The average Price-Earnings (P/E) ratio of 33.4 times was tantamount to an earnings yield of 3%. A share generated NGN16.38 in sales (2019:NGN15.99).

Operating profit margin and Profit Before Tax (PBT) margin averaged 6.4% and 14.5% respectively over the past ten years. The high cost of production, which is a bane of the Nigerian economy, is taking its toll on the profit margin of the company. Deliberate cost containment would help the company drive down costs and produce continual returns to shareholders.

UNILEVER has improved its working capital by curtailing its rising current liabilities. The current ratio was 2.3 times while the acid test ratio was 1.8 times. The company has loans of NGN239.4 million compared to NGN705.7 million recorded in the earlier year. . Also, total liabilities made up 32.1% of total assets and 47.3% of total equity. Sufficient coverage exists for creditors of UNILEVER; interest payment and liquidation of debts should not pose a problem for the company. The company’s long-term solvency, in our opinion, is not impaired.

Business Risk
The quality of receivables has deteriorated which means that a lot of debts may not be recovered. UNILEVER wrote off NGN396.3 million or 8.3% of gross trade receivables in year 2020. An additional provision of NGN684.5 million or 14.3% was made for credit loss. In all, about 23% of trade receivables may turn bad (2019: 8.1%). UNILEVER is also exposed to exchange rate volatility because it imports raw materials from abroad. Therefore, profit is vulnerable.

Recommendation: Buy

Earnings Chart of Unilever Nigeria Plc

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