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Unilever Nigeria: The pain of high interest rate

Unilever Nigeria is reeling in pain inflicted on its operations by high interest rates. The consumer goods manufacturer is compelled to surrender to its lenders the revenue it desires to save for shareholders. Rising finance charges are responsible for the major profit drops the company has experienced in the past two years. Interest expenses doubled at the end of the company’s third quarter operations this year, which has increased the speed of the profit drop.

Unilever lost nearly one-half in its preceding year’s profit at the end of 2014 to the lowest figure in six years. It closed the third quarter operations in September with a crash of 92% in after tax profit year-on-year. Finance charges gulped about N2.4 billion, double the N1.19 billion it paid in the same period last year.

The company’ after tax profit of N590 million in the first quarter was lowered by a loss in the second quarter to N85.6 million at the end of June. The loss followed the rise of 137% in interest expenses to over N1.6 billion. After tax profit improved to about N141 million in the third quarter.

Based on the growth rate in the third quarter, after tax profit is projected at N200 million for Unilever in 2015. This will be a big fall from the net profit figure of N2.41 billion the company posted at the end of 2014. Unilever maintained profit growth every year since 2007 to a peak of N5.60 billion in 2012. A decline of N15.6% in 2013 lowered the company’s after tax profit to N4.72 billion, which accelerated to a drop of 49% in 2014.

Sales revenue declined by 2% to N42.70 billion year-on-year at the end of the third quarter but a moderate growth in turnover still looks likely for the company at full year. We expect turnover to be in the region of N58 billion for Unilever at the end of 2015, which will be an improvement of about 5% over the 2014 closing figure of N55.74 billion. The company suffered a drop of N4.25 billion in turnover last year from its sales revenue peak of over N60 billion in 2013.

Profit margin has thinned down to a vanishing point from 4.2% in the same period last year and from 4.3% at the end of 2014 to 0.3% at the end of September. The declining profit margin is a reflection of inability to grow sales revenue and rising operating costs led by finance charges.

Apart from interest expenses, cost of sales is also encroaching into sales revenue. It grew by 4% year-on-year in the third quarter against a 2% decline in sales revenue. This has lowered gross profit margin from 38.4% in the same period last year to 34.8% at the end of the third quarter. However, distribution/administrative expenses, which proved difficult to control last year, are now in check with a decline of 4% at the end of the third quarter.

The company’s total borrowings have declined slightly to N16.67 billion from the closing figure in 2014, which cannot explain the doubling of interest expenses so far in the current year. While bank overdraft has expanded by 87% to N7.38 billion from the closing figure last year, short-term borrowings have dropped by 32% to N8.26 billion and long-term debts are only moderately up by at N799 million at the end of September. How a decline of 1.4% in total borrowings led to the doubling of interest charges may have to be explained by the details of the company’s accounts.

The cost-income relationship of the company during the review period resulted in a decline in net profit margin from 4.2% in the same quarter last year to 0.3% at the end of September. The company earned 4 kobo per share at the end of the third quarter, down from 48 kobo in the same period last year.

Other major developments in the balance sheet include a drop of 25% in inventories, an increase of 11% in trade debtors and other receivables and a rise of 203% in cash and bank balances. Trade and other payables rose by 29% during the period.

The company is facing cash flow difficulties induced mainly by cash utilisation for financing activities. There is however a major improvement with a shift from a net cash utilisation of over N1.82 billion from operating activities at the end of last year to a net cash generation of N9.78 billion from operating activities at the end of the third quarter. This was still insufficient to meet cash requirements for investing and financing activities, resulting in a net cash decrease at the end of the reporting period.


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