Unilever Nigeria: Turnaround journey losing speed

Unilever Nigeria’s strong turnaround move has slowed down further and the prospects for a major profit rebound at full year have dimmed. The company began the year with a strong first quarter within which it earned almost the full year profit figure it posted in 2015. It however lost the recovery momentum in the second and third quarters and the big turnaround earlier projected for the conglomerate appears no longer attainable this year.

The company lost one-half of its preceding year’s profit in 2015 – a running profit decline since 2013. That registered the lowest profit figure of N1.19 billion in many years – a fraction of its peak profit figure of N5.60 billion in 2012. A 76.4% rise in after tax profit in the first quarter to N1.04 billion was quite promising to lift the company’s profit to a three-year high. The impressive growth in the first quarter has not been sustained with after tax profit standing at N1.57 billion at the end of the third quarter.

Rising finance expenses accounted for the company’s sustained profit drop seen in the preceding three years. A sharp drop in finance charges permitted the profit rebound reported in the first quarter while a renewed growth equally explains the loss of momentum over the last two quarters. While finances expenses dropped by 33.3% in the first quarter, it grew by 8.4% within the three months of the third quarter. Nearly one-half of the company’s finance cost of N1.75 billion at the end of the third quarter was incurred within the third quarter alone.

The company is maintaining its strength in improving sales revenue and is still looking promising to set a new peak in sales revenue this year. It closed third quarter trading with sales revenue of N49.87 billion, an increase of 16.8% year-on-year.  This is an impressive growth record in a low consumer spending situation. The company had improved turnover by 6.2% to N59.22 billion last year, a recovery move after a 7.1% decline from the all time peak of N60 billion in 2013.

Recovery in sales revenue is expected to accelerate this year based on the growth record achieved in the third quarter. Our turnover projection of N68 billion for Unilever Nigeria at the end of 2016 is unchanged. That will be an increase of 15% over the 2015 figure and also a new peak in the company’s turnover records. Improving revenue capacity and a reduction in finance cost are the company’s key operating strengths impacting the income statement this year.

Unilever posted an after tax profit of about N1.57 billion at the end of the third quarter. This is a major advance from only N141 million in the same period last year but a sharp slowdown from N1.04 billion after tax profit the company posted in the first quarter. The company is already 32% above the N1.19 billion net profit it posted for the 2015 fiscal year. Based on the third quarter performance, the full year profit projection is revised from N4.5 billion to N2.2 billion for Unilever in 2016. That will still be a top growth record of 85% for the company that has been losing profit for the past three years. At N1.19 billion in 2015, the company’s profit amounted to about one-fifth of its peak profit record of N5.60 billion in 2012.

A final quarter surprise may however produce a better profit outcome than forecast as was the pattern last year. While the company closed the third quarter of last year with an after tax profit of N141 million, it ended the year with a bottom line of N1.19 billion.

Despite that finance charges have resumed growth, the cumulative figure still represents a drop of 27% to about N1.75 billion at the end of the third quarter. There is a shift from a 30% drop in short-term borrowings at the end of the first quarter to a sharp growth of over 111% to N15.69 billion at the end of the third quarter. This equally explains why the company finance expenses have stopped declining and have resumed growth.

Cost of sales, the second favourable cost behaviour that boosted profit performance in the first quarter, has equally changed position. It grew well ahead of sales revenue at 26.4% to N35.17 billion at the end of the third quarter and consequently claimed 70.5% of sales revenue compared to 64% in the first quarter. That has lowered gross profit margin from 34.8% in the same period last year to 29.5% at the end of the third quarter.

The company’s cost-income ratio increased at the end of the third quarter, which reduced its ability to convert revenue into profit. Net profit margin dropped from 6.2% at the end of the first quarter to 3.1% at the end of the third. This is still ahead of the company’s closing net profit margin of 2% in 2015.

It earned 41 kobo per share at the end of the third quarter, up from 4 kobo in the third quarter of last year. Earnings per share is expected to stand in the region of 58 kobo for Unilever Nigeria at the end of 2016, a downward revision from an earlier projection of N1.20. The company earned 32 kobo in the 2015 full year and gave out 5 kobo per share in cash dividend.