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Unilever Nigeria Plc: Local investors in flip flop over foreign investors’ repositionings

Stock fails to respond to bullish sentiment

By Emeka Anaeto, Business Editor

UNILEVER Nigeria Plc,  one of the leading multinationals on the Nigeria Stock Exchange, NSE, has presented a, rather, mixed sentiment in the stock market in the days after April 18, 2017, when it announced an impressive first quarter 2017 (Q1’17) results.

The company, parading leading some brands in the FMCG (fast moving consumer goods) market segment, has always been resilient in the stock market because of good fundamentals. But in the past 18 months, the investors’ sentiment has not been favourable, due largely, to setbacks in its financial performance occasioned by Nigeria’s macroeconomic headwinds.

Yaw-Nsarkor, MD, Unilever Nigeria

It now became discomforting that at a time the stock market is on its best bullish season in recent years with signs of economic rebound, Unilever failed to benefit from the positive flip.

Closing at N35.55 last weekend, the stock had gained just 7.2 per cent since the impressive result was announced and even far less while the bulls market persists, performing far below the market benchmark, despite having one of the best Q1’17 results and all-time fundamentals among the peers.

What is the problem? Let’s first take a look at the good results.

Q1’17 review

Unilever had, in April, reported an impressive Q1’17 results showing significant leaps in both top-line and bottom-line, all beating analysts’ consensus estimates. Turnover rose by  32.1 per cent year-on-year (YoY) to  N22.2 billion, while after tax earnings rose markedly by 53.9 per cent YoY to  N1.6 billion.

¨A breakdown of segments’ contribution to top-line shows significant growths across virtually all product segments with food segment rising by 22 per cent, home care was up 49.7 per cent and personal care up by 37.2 per cent.

However, gross margins at 28.4 per cent represent a contraction of 756 basis points (bps) against the corresponding period of 2016 (Q1’16) but shows some expansion of about 27bps compared to previous quarter (Q4’16).   This, some analysts believe, is suggestive of sticky, and perhaps, rising per unit production cost, consequently pressuring gross profit which grew by a marginal 4.3 per cent YoY.

Operating profit margin expanded to 12.4 per cent from 11.4 per cent in Q1’16 as the UNILEVER effectively contained rising operating expenses.¨But while  operating expenses fell by 14.1 per cent YoY, finance costs trended higher by 33 per cent YoY.

Some observers believe revenue growth was driven principally on account of significant increases in sales volume. However, while noting that the result suggests UNILEVER may have increased market share during the period, some other observers believe that revenue continued to benefit strongly from the increase in the prices of key products.

UNILEVER increased the prices of CloseUp, Knorr, Lipton, Omo and Sunlight in February and March this year. And bearing in mind the continued resilience of the Food (+22 per cent YoY) and Home Care (+49.7 per cent YoY) divisions, it is notable that the surge in Personal Care revenue (37.2 per cent YoY) contributed immensely to the overall strong top-line performance.

Analysts noted that one of the positive surprise from the Q1’17 result is the decline in operating expenses, with brand/marketing and overheads expenses specifically falling by 45 per cent YoY and 11 per cent YoY respectively.

The funding problem

However, the significant rise in finance costs mirrors the increase in gross debt to N25.4 billion, from N20.9 billion at the end of 2016. During the period, the company drew on an overdraft facility of N3.5 billion and increased other short term borrowings by about N1 billion.

Again, mirroring the funding pressures, the company had announced last month, the plan to raise capital via Rights Issue, the proceeds of which would be channeled to overhauling the balance sheet towards equity while raising working capital and capital expenditure investments.

Problems from overseas

Also last month the parent company, Unilever Group, indicated its intention to divest its spreads business as part of the outcome of the strategic review embarked on. In line with this development Unilever Nigeria is expected to sell its Blue Band product, which by some estimates accounts for about 24 per cent of its gross revenue and which has the biggest share of the Nigerian spreads market.

This obviously will affect the Nigerian company’s top-line when consummated, and it appears adverse more so when the Nigerian operation indicates continued growth and investments in business development just before the overseas decision to cut it short.

For some analysts, while the latest result appears impressive from the point of view of revenue and OPEX, the focus is on the continued pressure on gross profit. This, if not addressed, portends imminent earnings weakness in the event that revenue growth runs out of steam especially at the backdrop of the withdrawal from the spreads business. Moreover, OPEX is expected to rise further.

The Recapitalisation

The last Annual General Meeting had passed a resolution that the Authorized Share Capital of the company be increased to N5 billion (from N3.03 billion) by the creation of additional 3.95 billion new ordinary shares of 50 kobo and to raise up to N63 billion by way of Rights Issue, subject to obtaining regulatory approval.

As at the time of announcing the new capital issue the company’s market value of N33.25, would have yielded the N63 billion proposed capital raise which equates to new 1.89 billion ordinary shares that would be offered to existing shareholders (assuming all current shareholders take up their rights) of the company. This potentially increases the overall shares outstanding in favour of UNILEVER to 5.68 billion (from 3.78 billion).

Though the stock price lost five per cent following the announcement, in what analysts see as negative investor reaction in view of the potential dilutive impact of the additional share offering on share holding and possibly, dividend payment, it has recently bounced back over-shooting the earlier position to close last week at N35.55.

It is expected that the Rights Issue would come at a discount of about five per cent to market price, indicating that the N63 billion targeted fresh capital may be surpassed. However, this forecast is based on sustained bullish stock market, which many analysts expect to buck any moment from now.

Other finance intricacies

But the financing structure is more complex than this. In addition to the rights issue, the Directors of Unilever Nigeria got shareholders authorization to apply any outstanding convertible loan, shareholder loan, or other loan facility due to any person, towards payment for any shares subscribed for by such person under the Rights Issue.

Connected to this resolution was the outstanding N20.92 billion debt the company had as at the end of 2016 financial year, mainly comprising of N15.15 billion intercompany loan, and N5 billion commercial bank loan, as well as N702.7 million facility from the Bank of Industry (BoI). About 98 per cent of these outstanding debts are short term.

Of the above mentioned loan facilities, in line for conversion to equity via the proposed Rights Issue is the intercompany loan. Unilever Nigeria obtained an intercompany loan of USD59.7 million (N18.81 billion) from Unilever Finance International AG in the third quarter of last year to clear the backlog of unpaid USDollar-denominated obligations to suppliers and refinance expensive local short term debts as listed above. Unilever Finance International AG is also a member of the Unilever Group.

Commercial bank loans

Analysts believe this latest move by the Unilever Group can be likened to a similar conversion of Diageo’s (global majority shareholders in Guinness Nigeria) USD95 million loan to its Nigerian subsidiary, Guinness Nigeria Plc, into equity stake via Rights Issue.

Putting these in context analysts at Cordros Capital, a Lagos based investment house stated: “In addition to the debt-equity swap, our hunch is that part of the proceeds of the Rights Issue will be utilized for (1) the repayment of outstanding commercial bank loans (priced at 14 per cent as at end-2016), (2) the settlement of backlogs of trade payables, as well as, (3) working capital and capital expenditure investments.

“On the repayment of borrowings, the current option being considered by the management of UNILEVER can be taken for a bold attempt to (1) guide against potential FX losses attached to the USD facility (we estimated N2.9 billion) in the event that the NGN/USD devalues to N352, the mid-point of the IMF’s suggested fair value and (2) improve the company’s deteriorating coverage and leverage ratios.

“We expect total debt will be reduced from N20.92 billion to only the N702.7 million due to the BoI, potentially driving down interest expense to a record low of N70 million.”

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