Unilever Nigeria

Poor Performance Shakes investor confidence

Unilever Nigeria's recently released half year earnings, report to put it mildly, was unimpressive as the company's top and bottom lines were in the south direction. This was attributed to stable price of its products irrespective of the increasing cost of production and marketing, amidst competition that is daily becoming stiffer. This was so, as price increase in the face of declining disposable income of many Nigerians continued unabated.

The numbers revealed a two per cent drop in sales revenue to N28.72 billion from N29.28 billion in the corresponding first half of 2014. This drop in revenue was made worse by the four per cent rise in cost of sales at N18.97 billion, while other costs elements like distribution/administrative were curtailed at  N8.30 billion.
Unilever Nigeria had its problem compounded by the absence of a buffer, with little or no retained earnings due to its high dividend payout ratio. As if these were not enough problems already in one season, the cost of servicing its borrowing remains high as financial charges for the period under review increased by 137 per cent from N677.85 million in 2014 to N1.61 billion. Also in the same direction, its debt profile has increased but with strong operational cash flowit is possible for the company to reverse the current trend in its profitability level. 

All said, Unilever Nigeria's high cost of operation expectly affected its profit level, which dropped to N85.57 million from N1.46 billion in the corresponding half year. 
Considering this trend in Unilever Nigeria's financials, we do not see higher earnings power in 2015 that would drive the price and provide dividend for investors. The stock is grossly overpriced at the current market price. Its book value currently stands at N1.90 with price to earnings ratio that is unexplainable.

UNILEVER NIGERIA PLC
Half Year  2015
COY	2015	2014	% Chg
	(N)	(N)
Date Released	July 23, 2015	July 18, 2014
Price as@Rel.Date	37.32	52.77
Gross Earnings	28,721,837,000	29,280,133,000	-2.
Profit After Tax	85,573,000	1,464,573,000	-94
Shareholders' Fund	7,186,051,000	6,375,148,000	12.73
ESTIMATED RATIOS
Earnings Per Share	0.02	0.39	-94
PE Ratio	1649.97	136.32
Earnings Yield	0.06	0.73	-92
Book Value	1.90	1.69	12.4
ROE	0.01	0.23	-96
Profit Margin	0.30	5.00	- 94
	Dec	Dec

         SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Valuation/Recommendations

The continued decline in the company's earnings is a major source of concern for all stakeholders of the company, with second quarter book value at N1.90 and dividend yield of 0.26 per cent, signifying a grossly overvalued stock at the current market price. On the strength of its Price-Earnings-Ratio of 1649.97x, which is the highest in the market and its sector.
The share price of Unilever is fairly and technically placed at N8.  As future earnings will determine any review. 
The company has been paying off all its earnings as dividend, just to appease the majority shareholders and parent company- Unilever Overseas Holdings. As a result, it has continued to borrow to run its operations.This has also continued to eat into the company's profit, reducing its working capital and increasing its gearing ratio.Let us believe that the recent increase in the parent company's holdings would bring additional expertise to revitalise Unilever Nigeria. We advise investors in the stock to sell and reposition when positive numbers start emanating from the company.

History

Unilever Nigeria Plc, was incorporated as Lever Brothers (West Africa) Limited on April 11, 1923 by Lord Leverhulme. After a series of mergers/acquisitions, the company diversified into manufacturing and marketing of foods, non-soapy detergents and personal care products.
These mergers/acquisitions brought in Lipton Nigeria Limited in 1985 and Cheesebrough Ponds Industries Limited in 1988. The company changed its name to Unilever Nigeria Plc in 2001.
Today, Unilever Nigeria Plc is a public liability company quoted on the floor of the Nigerian Stock Exchange since 1973 with Nigerians having 49 per cent of equity holdings.

Unilever Nigeria Plc manufactures and markets consumer products primarily in the home, personal care and foods categories.

The company sells products such as Omo washing powder, Key soap, Royco bouillon, Lipton Tea, Blue Band margarine, Pears baby care goods, Vaseline petroleum jelly, Lux soap, and Close-Up toothpaste.
The stock has enjoyed constant positive fundamentals which in turn attracts good patronage from the investing public due to its consistently high dividend payout.

In recent years, the company's sales revenue has been dwindling, a reality that was made overt in last year's scorecard when dividend payment declined by 92 per cent.The performance was further weakened by the 10 Kobo dividend declared by the company's board.

Although profit for the period was down to its comparable period’s figure, investors’ reactions seem to be positive as Unilever International plans to increase its stakes to 75 per cent. 

The price movement of the equity through 2014 financial year was weak. The stock price is currently N8.

Unilever Nigeria PLC
Share Holding Structure
Unilever Oversees Holding BV	50.04%
Nigerians	49.06%
Other Statistics
Shares Outstanding (MN)	3,783,296,250
Opening Price (2015)	N35.80
Closing Price as @ Aug 7, 2015	N37.81
Date Listed	September, 1973
Year End	31st December

Management

It is true that a company’s earnings performance reflect the management’s commitment, competence and ability to strategically reposition its products or services to drive profitability.

The dwindling performance of Unilever in recent quarterly and full-year results calls for serious attention as the company has departed from its good days of impressive performances that supported its operation lines and share price. 

The management team, led by a Ghanaian should be more proactive in recapturing lost market share and building top line to enhance profit.

Performance Analysis

Looking at the numbers posted over the period of five years, it is obvious that the business environment was challenging for Unilever as infrastructure problems like power impacted the cost of production negatively, just as the increasing competition from companies that are formidable, as well as cottage industries with close substitutes of its products on offer at cheaper prices.

But then, a cursory look at the company's five-year (2010 to 2015) financials however reveals that the problem did not start just now. Within the period, Unilever Nigeria marginally built its sales revenue. The full year turnover stood at N55.74 billion from the N46.80 billion of 2010.

Meanwhile, profitability experienced a mixed performance as it grew from N4.18 billion in 2010 through N5.51 billion in 2011 to N5.59 billion reported in 2012 financial year before declining in 2013 to N4.81 billion. In 2014, the numbers further plunged to N2.86 billion representing a 50 per cent slide in profit.

Shareholders' fund on the other hand currently stands at a five-year low of N 7.48 billion  from N8.34 billion in 2010 after it had hit N10.04 billion in 2012.

Please note this is a breakdown of the numbers posted within the period under consideration. 

The company's unfailing dividend payment policy with a high payout ratio made the stock of Unilever investors' choice before now. The current dividend of 10 kobo, represents a 92 per cent decline from N1.25 paid in 2013, after it had rewarded shareholders with N1.40 in 2012 and 2011 from N1.10 paid in 2010.

The paying of all its earnings as dividends to its investors has affected its shareholders fund, working capital and retained earnings before now.
The last payout was 15.53 per cent of earnings after the company earnings power had nose-dived by 50 per cent.

The high payout as a result of capital flight has started affecting the company as it is losing its market to others.

UNILEVER  FIVE YEARS FINANCIAL PERFORMANCE
	2014	2013	2012	2011	2010
Date Released	March 26, 2015	March 28, 2014	April 4, 2013	April 18,2012	May 13,2011y 2011
Price @ Released Date	N37.48	N45.15	N53.50	N28.70	N27.00
Gross Earnings	55,754,309,000	60,004,119,201	55,547,797,896	54,724,749,000	46,807,860,000
Profit After Tax	2,412,343,000	4,806,907,383	5,597,613,329	5,515,213,000	4,180,000,000
Shareholders' Fund	7,478,808,000	9,639,695,298	10,043,523,594	9,634,650,000	8,335,000,000
Dividend	N0.10	N1.25	N1.40	N1.40	N1.10

SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Estimated Performance Ratios

The company's financial ratio for the period under review shows that the amount earned by investors and management were low of 64 kobo in 2014 with the high of N1.48 in 2012, while 2013, 2011 and 2010 recorded earnings per share of N1.27, N1.46 and N1.10 respectively. This is a reflection of the unstable earning power of the company. Price earnings ratio is high at the current estimate of 58.78x from the low of 19.69x in 2011. The last full year EPS is a yield of just 1.70 per cent of the market price as of the release date. This simply signifies an overvalued stock by the market as against the posted numbers.
This was further indicated by the Book Value that ranges between the low of N1.98 and high of N2.65. Putting this ratio and the market price of the stock signals serious caution for short and medium term investors. The profit margin of the company is low and declining even further.

UNILEVER- ESTIMATED RATIOS
	2014	2013	2012	2011	2010
Earnings Per Share	0.64	1.27	1.48	1.46	1.10
PE Ratio	58.78	35.54	36.16	19.69	24.44
Earnings Yield	1.70	2.81	2.77	5.08	4.09
Book Value	1.98	2.55	2.65	2.55	2.20
ROE	0.32	0.50	0.56	0.57	0.50
Profit Margin	4.33	8.01	10.08	10.08	8.93
Year End	Dec	Dec	Dec	Dec	Dec

SOURCES: COMPANY DATA & INVESTDATA RESEARCH