August 28, 2017

Unilever Nigeria Plc: Investment gains in Rights Issue defy bear run

By Emeka Anaeto, Business Editor

DESPITE recent profit takings in the equities investors in the Rights Issue of Unilever Nigeria Plc are still on massive discount of over 27 per cent following the price surge in the equity shortly after the offer opened last month. The Rights Issue is closing next week.

At offer price of N30 the stock traded at N39.66 in the Nigerian Stock Exchange on the opening date, July 31, 2017, but it closed higher at N41.30 last weekend amidst huge bear run that pervaded the stock market last week on the wings of bargain hunting and profit taking by investors.

Unilever is raising about N58.9 billion from the Right Issue at a ratio of 14 new ordinary shares for every 27 ordinary shares held as at the close of business on Wednesday, 28 June 2017.

Unilever strategic plan

The Rights Issue is part of Unilever Nigeria’s long term strategic intent to strengthen the company’s capital base by deleveraging its balance sheet, support its working capital needs and position the company to exploit value accretive opportunities. The proceeds will be used to repay the company’s outstanding foreign currency denominated liabilities, purchase additional raw materials required for its products and to meet other working capital requirements.

The Rights Issue would help the company achieve its strategic plans and position it for future growth.

Part of the strategic plans is to drive operational efficiency through optimalisation of investments in technology to improve functions and processes; broaden its brand portfolio by leveraging on innovation successes of Unilever Group; as well as continuous investment in health and safety systems in line with global best practices.

The strategy also aims at increasing domestic production by further on-shoring of production; continuous review and investment in the company’s transportation and distribution network to optimise efficiencies; participate in industry wide initiatives to attract investments for the local sourcing of key raw materials.

Sourcing of key raw materials

The strategic plan involves accelerating the “Connected for Growth” Programme, aimed at transforming organisational processes to ensure a faster, simpler and more consumer and customer centric organisation. It would also implement strategies to defend and grow market share across categories, channels and locations.

The company is also looking at increasing positive social impact through the Unilever Sustainable Living Plan,   while driving profitable growth for its brands, and ensuring minimal impact on the environment.   Under the strategic plan Unilever would be procuring raw materials through sustainable sources while minimizing water consumption and wastage.

The strategy would also improve distribution efficiency by sustaining investment in route-to-market network to continuously meet changing consumer demands while continuously reviewing transportation network to ensure efficiency.

Unilever Nigeria has a rich portfolio of international and local brands across various segments with a strong parent company support as well as a well established distribution network.

The company’s major weakness in recent years has been its exposure to foreign currency denominated liabilities which the current Rights Issue is set to resolve.

With a portfolio of premium product brands Unilever is well positioned to leverage Nigeria’s large and growing population and consequently, a large potential market with a rising disposable incomes. These, over the long term should, serve to increase demand for the company’s products. The company is also positioning to reap from increased local sourcing of raw materials to reduce exposure to foreign exchange volatility.

Investment value

Investment analysts believe Unilever is a high investment grade blue chip stock due to its diversified portfolio of products, a broad portfolio of market leading brands. The company combines its multinational expertise with its vast knowledge of the Nigerian culture to provide a range of products across various price points.

Attractive sector – Nigeria’s large population and growing consumer class provides an attractive market for the growth of the consumer goods sector in the country

Unilever is said to be running on a well established route to market, efficient distribution system. Its distribution outlets and partnership with key distributors ensures its products are available and its brand is visible in the Nigeria’s vast market.

Moreover, the company benefits from a rich global heritage and consistent support from its parent company, while locally it is reputed to be running on experienced management team, as well as extensive experience in the fast moving consumer goods (FMCG) sector with an average of over 20 years experience combined with a strong corporate governance culture.

Over the years the company is noted for solid financial performance.

The Rights Issue further provides an opportunity for the company to strengthen its capital base to support business growth, deepen capital resources in other to maximize shareholders value

The company in a statement to investors said: “The Rights Issue represents a milestone event in Unilever Nigeria’s history as it marks the Company’s first follow-on equity offering since its listing in 1973.   Through this Rights Issue, Unilever Nigeria will be able to strengthen its capital base to support business growth and deepen capital resources.

“Unilever Overseas is fully committed to the success of the Rights Issue and intends to take up its rights.   We urge all shareholders to support the Company’s objective by participating in the Rights Issue to ensure the Company can obtain the flexibility to attain its growth objectives.”

Unilever financials

Investment analysts at Cordros Capital Limited said Unilever’s second quarter 2017 (Q2-17) result was impressive beating consensus forecast.

The result which was released mid-last month showed both revenue and net profit growth of 58% and 3873% year-on-year (YoY) respectively. Compared to Q1-17, revenue grew 3.4% while net profit increased by 29.4%. Cordros stated: “Both the revenue of N22.9 billion and net profit of N2.1 billion were ahead of our estimates of N20.4 billion and N860 million respectively.”

The Qurater-on-Quarter (QoQ) revenue growth in Q2 is Unilever’s first since Q2-14.

Analysts at Cordros stated: “It is important to reiterate that while revenue continues to benefit from the increase in the prices of key products, recent results suggest that the company is increasing market share. “We had mentioned that Unilever backed the recent price increases with strong promotional activities, and that the slow recovery of import-dependent competition is also supportive of sales. We note particularly, the recovery in the Personal Care division, wherein revenue growth was 53% in H1-17, after lagging other divisions in the last two years.” Revenue in this category grew by 73% YoY and 1% QoQ in Q2-17.

Revenue in the Home Care division grew by 77% YoY and 17% QoQ, and while Food revenue declined by 2% QoQ, it grew by 24% YoY during the review period.

Cordros analysts also stated: “Another positive surprise from the second quarter result is the strong rebound in gross margin to 33.2%, from 28.4% in Q1-17, 27.9% in Q2-16, and above our 28% forecast. The quick margin recovery to historical level was underpinned by pricing actions, positive mix, and importantly, exchange rate-linked cost savings.

“Over H1-17, Unilever’s net profit is up by 236%, and well-ahead of consensus. Hence, we look for positive reaction to the latest result on expected upward revision to forecasts.”