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Unilever Nigeria still not out of the woods as cost inflation looms

By David Whitehouse
Posted on Friday, 23 July 2021 10:23

Toothpaste being produced at the Unilever factory in Lagos. REUTERS/Afolabi Sotunde

Unilever Nigeria still has a lot to do to turn the corner after a return to profitability in the second quarter, investors and analysts say.

The results for the three months to 30 June, announced before this week’s holiday in Nigeria, saw pre-tax profit rebound to N940m ($2.3m) after a loss of N1.5bn a year earlier. Revenue jumped 41% to N19.7bn.

Expectations of post-Covid reflation have lifted world equities this year on expectations that companies will be able to lift prices. But higher costs are likely to hurt companies with increased need for raw materials. The global parent company Unilever, which holds 76% of Unilever Nigeria, said on 22 July that increasing commodity costs would harm its full-year operating margin, driving shares down on the London Stock Exchange.

The risks that Unilever faces are magnified in Nigeria. Unilever Nigeria’s ability to source raw materials locally may hamper growth in [the] context of farming insecurity, says Ibrahim Shelleng, managing director at Credent Investment Managers in Abuja.

  • The company has increased its spending on marketing and distribution with a positive impact on revenue, and expensive imports will lead to more consumers seeking local products, Shelleng says.
  • But the improved figures must be seen in the context of the 2020 results, which were largely affected by Covid-19 lockdowns and border closures, he says.
  • Impairment losses on trade receivables, which weighed on profitability in 2020, have now become insignificant, he says.
  • “I remain neutral on the shares, as supply side shocks may impact full-year figures,” says Shelleng.

Special dividend?

The improved results were due to a stringent credit policy and the favourable base effect, says Itome Edache, an analyst at Chapel Hill Denham in Nigeria. Still, the business faces fierce competition in both its food, home and personal care segments, she says.

Going forward, revenues will be determined by how fast consumer incomes rise, says Edache, who rates the shares as a buy.

The results show ‘signs of improvement’, according to a note from Renaissance Capital analysts Adedayo Dayo Ayeni and Chibundu Emeka-Onyenacho. The business benefited from price increases implemented across all segments, volume gains and product introductions such as laundry detergent, the note says.

Renaissance notes that the net cash balance expanded to N44bn from N36.9bn at the end of 2020, which equates to 58.7% of current market cap. The cash balance and low capital expenditure needs “raise the possibility of a buy back or the board recommending an extraordinary dividend” in 2022, Renaissance says.

This is on the assumption that foreign-currency liquidity in Nigeria improves, and that parent company Unilever can adequately source foreign exchange to repatriate its dividends, Renaissance says.

  • Still, Renaissance has concerns about the sustainability of the ‘relatively weak’ operating margin, considering the increasing commodity prices and costs of production. Renaissance estimates that an increase of about 3% in the cost-of-goods-sold margin, which could result from further currency weakness or higher raw material costs, could wipe out operating profit.
  • Nestlé Nigeria is more attractive on the basis of margins, Renaissance says.
  • Renaissance Capital has a ‘sell’ rating on Unilever Nigeria’s shares, with a target price of N9.90, versus its mid-July price of N13.05.

Bottom line

The reflation trade cuts both ways, and Unilever Nigeria risks being on the wrong side of it.

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