Company: Unilever Nig. Plc (UNILEVER)
Current Market Price: N55.00
Fair Value: N22.00
By: Jeariogbe Tunde Segun
Key Financial Tickers:
- This report explores the first quarter result of Unilever for the period ended 31st March, 2018 as released by the company.
- The company raised investors’ stake as approved by its shareholders in its 2016 annual general meeting through right issue. In the offer, it raised around N63 billion from its existing investors
- Recall that before this, it runs a very high Debt to Equity ratio of over 120%. As at the end of 2016FY, UNILEVER had N20.92 billion outstanding in debt, mainly comprising N15.15 billion intercompany loan, N5 billion commercial bank loan, and N702.7 million facility from the Bank of Industry (BoI). Note that 98% of the outstanding debts are short term. Hence,
- 67% of the proceed was planned for repayment of foreign currency denominated obligations
- 20% to purchase raw materials
- 13% to strengthen the company’s working capitals
- The effect of this seems to be looking up on its operation as few key financial ratios had improved as will be seen in this report.
- The company have its products in three key categories, namely; Food & Drink, Home Care and Personal Care
- The Food sector includes three well known and used products; Royco, Knoll Cube and Blue Brand
- It also has popular but well competed products in the name of Omo. This products, though has been in existence for ages, is strongly challenged by several local products.
- Under the personal care categories, it has seven products; Lifebouy, Rexona, Vaseline, Axe, Fair & lovely, Sunlight & Geisha
- In our opinion, the management of Unilever should explore the opportunity of improved equity and improved its R&D department. If this is properly done, it will improve the company’s products and truly replace it in the industry despite challenges
- Though it operates in a very highly competitive industry where entry and exit is almost free and cost of same is low; we believe if the management explore aggressive advertisement power over peers (who are considered small and weak financially), a better result will be achieved.
- The Turnover (TO) figure improved over comparable year by 11.85% from N14.384 billion to N16.089 billion.
- Profit before Tax (PBT) for the year stood above 2016 earnings by 504% as it currently reported N1.124 billion as against N185.999 million last year.
- The higher PBT reported in the current year was chiefly enhanced by the N1.195 billion realized as Interest Income of Short Term Deposits as against the N171.556 million realized in 2016.
- Nevertheless, Profit for the year reported in 2016 was boosted by Income Tax Credit of N2.192 billion as against the Tax Expenses of N637.83 million reported in 2017
- As noted above, the Total Liability reported for the just concluded financial year is purely current liabilities as the firm currently has no long time liability in its account.
- From our estimates, we arrived at Total Debt to Equity ratio of 68.72% although this is quite higher than the industrial average of 9.62%, it is a fair figure when compare to its debt profile before now
- Current ratio is below a unit and below the industrial average of 1.23x. This implies the company inability to offset its short term liability without delay.
- The share price momentum is below the market at 0.92x, nevertheless it is above its industrial peers at 0.81x. Also note that comparing the company’s beta with industrial average, we can safely conclude that the low momentum is common in the industry
- Unilever is very strong to take care of all its outstanding interest paying liabilities, judging by the high interest coverage estimated from its figures. Please understand that the ratio still stand below the industrial average.
- Although typical of its industry, the Cost to Sales Margin is on the high side, the ratio also increased marginally above the comparable period of 2017 by 1.01%. We are of the opinion that strict care should be taken by Unilever to ensure reduction rather than the increase of this ratio
- In line with the above, Profit before Tax (PBT) margin is 15.20% about 54.56% above last first quarter margin
- Similarly Profit after Tax (PAT) stood above 2017 first quarter’s by 55.32%
- Both Return on Average Equity and Assets are very unimpressive at 3.68% and 2.18% respectively
- Total Assets Turnover ratio stemmed below 2017’s by 22.50% moving from the 25.05% estimated last year to the current 32.76%
- Please note that the reduction in the equity multiplier ratio is positive as it implied the company now uses less debt to compare to equity to finance its assets purchases. Note that this is the impact of the funds raised in 2017
- The management of Unilever seems to be effectively controlling its investment in plants, equipments and other fixed assets. This can be substantiated by the increasing Fixed Assets Turnover Ratio. As can be seen from the below table, the ration increased by 16.42% from 0.71 to 0.83.
- Generally, we scored the management of Unilever above average, though we expect better improvements in these ratios from the next quarter.
- Bothe the Earnings and Total Comprehensive Income per Share improved by 19.10% over similar period of 2017
- The 50k earned through the three months under estimate yielded 0.92% of the current market price, this is lower than the 1.28% yield achieved in 2017. Please understand that the share price of Unilever improved by 65.91% within the two period under comparison.
- Investors’ preference for the shares of Unilever improved as justified by the PE/Ratio shift from 19.56x to 27.25x.
- Implying an overvalued position, is the very high Price to Book Value, a value that dropped by 57.50% from Q1-2017 to 2018 due to the improvement in the shareholders’ fund within the two periods. As can be seen from the below table, the ratio is now 4.01x as against 9.43x.
- Supporting the above fact is the N13.72 book value which stood far below the fair value of N55.00
We explored mixed valuation techniques while attempting to place a value for the share price of Unilever, one key consideration of our valuation method is the dividend payment status of the company, possibilities of dividend/earnings improvement over the next period in 2018. Our growth expectation on these two indices is linked to the improvement achieved by the company through the last fund sourced through right issue. Finally, a blend estimate of our model brings us to N22.00 intrinsic value for each units of Unilever share.