Unilever: In Need Of Better R&D, Aggressive Marketing To Boost Returns

Company: Unilever Nigeria Plc
Rating: Hold
Current Market Price: N55.00
Fair Value: N22.00
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers:
• This report explores the first quarter result of Unilever Nigeria Plc for the period ended March 31, 2018 as released to the Nigerian Stock Exchange (NSE).
• The company raised fresh N63bn as approved by its shareholders at its 2016 annual general meeting by way of a rights issue from its existing investors
• Recall that before this, Unilever Nigeria ran on a very high Debt/Equity ratio of over 120%. As at the end of 2016FY, it had N20.92 billion outstanding debts, comprising mainly the N15.15 billion intercompany loan; N5 billion commercial bank loan, and another N702.7 million facility from the Bank of Industry (BoI). Note that 98% of the outstanding debts were short term. Hence,
 67% of the proceeds was planned for repayment of foreign currency denominated obligations
 20% to purchase raw materials
 13% to strengthen the company’s working capitals
• The effect of this seems to be looking up on its operation as few key financial ratios had improved as will be seen in this report.

The Strength
• The company has products in three key categories, namely; Food & Drinks, Home Care and Personal Care
• The Food sector includes three well known and used products; Royco, Knorr Cube and Blue Brand
• It also has popular Omo detergent, which today faces very stiff competition from all fronts.
• Under the personal care category, it has seven products; Life buoy, Rexona, Vaseline, Axe, Fair & lovely, Sunlight & Geisha
• In our opinion, the management of Unilever should explore the possibility of improving its Research &Development department. If this is properly done, it will improve the company’s products and truly replace it in the industry despite challenges
• Though it operates in a highly competitive industry where entry and exit is almost free and cost of same is low, we expect that the management can explore aggressive advertising to increase market share, particular as most of them are considered small and weak financially.
Corporate Figures
• Turnover improved over comparable year by 11.85% from N14.384 billion to N16.089 billion.
• Profit before Tax (PBT) for the year stood above 2016 by 504% as it currently reported N1.124 billion, up from N185.999 million in previous year.
• The higher PBT reported in the current year was chiefly enhanced by the N1.195 billion realized as Interest Income on Short Term-Deposits as against the N171.556 million in 2016.
• Nevertheless, Profit for the year reported in 2016 was boosted by Income Tax Credit of N2.192 billion as against the Tax Expenses of N637.83 million reported in 2017.

Liquidity/Risk Ratios
• From our estimates, we arrived at Total Debt to Equity ratio of 68.72%. Although, this is quite higher than the industry average of 9.62%, it is a fair value when compared to its debt profile before now
• Current ratio is below the industry average of 1.23x, which implies the company’s ability to offset its short-term liability without delay.
• The share price momentum is below the market at 0.92x, nevertheless it is above its industrial peers at 0.81x. Also note that comparing the company’s beta with industrial average, we can safely conclude that the low momentum is common in the industry
• Unilever is very strong to take care of all its outstanding interest paying liabilities, judging by the high interest coverage estimated from its figures. Please understand that the ratio still stands below industry average.

Profitability Ratios
• Although typical of its industry, the Cost to Sales Margin is on the high side, the ratio also increased marginally above the comparable period of 2017 by 1.01%. We are of the opinion that strict care should be taken by Unilever board and management to ensure a reduction rather than increase of this ratio
• In line with the above, Profit before Tax (PBT) margin is 15.20% about 54.56% above last first quarter margin
• Similarly Profit after Tax (PAT) stood above 2017 first quarter’s by 55.32%
• Both Return on Average Equity and Assets are very unimpressive at 3.68% and 2.18% respectively.

Efficiency Ratios
• Total Assets Turnover ratio stemmed below 2017’s by 22.50% moving from the 25.05% estimated last year to the current 32.76%
• Please note that the reduction in the equity multiplier ratio is positive as it implies that the company now uses less debt, compared to equity for financing its assets purchases. Note that this is the impact of the funds raised in 2017.
• The management of Unilever seems to be effectively controlling its investment in plants, equipment and other fixed assets. This can be substantiated by the increasing Fixed Assets Turnover Ratio. As can be seen from the below table, the ration increased by 16.42% from 0.71 to 0.83.
• Generally, we score the management above average, though we expect better improvements in these ratios from next quarter.

Investment Ratios
• Both the Earnings and Total Comprehensive Income per Share improved by 19.10% over similar period of 2017
• The 50k earned through the three months under review yielded 0.92% of the current market price, which is lower than the 1.28% achieved in 2017. Please understand that the share price of Unilever improved by 65.91% within the two periods under comparison.
• Investors’ preference for the shares of Unilever improved as justified by the PE/Ratio shift from 19.56x to 27.25x.
• Implying an overvalued position is the company’s very high Price/Book Value, which dropped by 57.5% from Q1-2017 to 2018 due to the improvement in the shareholders’ fund within the two periods. As can be seen from the table below, the ratio is now 4.01x as against 9.43x.
• Supporting the above fact is the N13.72 Book Value which stood far below the fair value of N55.00

We explored mixed valuation techniques while attempting to place a value for the share price of Unilever. One key consideration of our valuation method is its dividend payment status, possibilities of dividend/earnings improvement over the next period in 2018. Our growth expectation on these two indices is linked to the improvement achieved by the company from the last rights issue. Finally, a blend estimate of our model brings us to N22.00 intrinsic value for each units of Unilever share.