RENCAP| We revise our estimates for Unilever. Our key changes are driven by the expected impact of a stronger cash-build on interest income, CapEx cuts to match depreciation in forecast years and medium-term margin expansion. As a result, we up our TP by 23.0% to NGN40.5/share.
The increase is further driven by a lower risk-free rate of 13.7% and an upward revision to FY18E EPS. We maintain our SELL rating as we believe its valuation is still stretched given the recent re-rating. On our estimates, Unilever trades on FY18 P/E and EV/EBITDA multiples of 29.0x and 18.0x, respectively.
While still trading below its five-year average forward P/E of 39.2x, we are still unable to justify the stock’s valuation at this level vs Nestle Nigeria (SELL; TP: NGN1,262.9; CP: NGN1,380.0), which we estimate trades on FY18 P/E of 26.6x.
Changes to estimates driven by excess cash in FY18-19E
Given the slowdown in sales growth observed for Nestle Nigeria in the food segment in 4Q17 and that we are yet to see material increases in the price of Knorr in the current quarter, we revise our estimates for Unilever. We cut our sales forecasts by an average of 1.7% in FY17-18 and by 6.2% in FY19. We raise our EBITDA forecast by 2.3% in FY18 and 10.6% in FY19 as we view management’s drive to contain costs and move the production of Blue Band margarine to Nigeria as pleasing and supportive of medium- to long-term margin capture.
However, we are mindful of tailwind FX risks associated with Unilever’s FX exposure. In a meeting with management in 2017, it admitted that its FX effective rate was closer to NGN285/$ when most of the consumer companies under our coverage were sourcing FX at rates above NGN300/$. With FX rates now above ~NGN335/$ for most consumer companies and price increases in FY18-20 expected to be sub-inflationary, we expect EBITDA margin to decline to 14.7% in FY18. However, we raise our net profit forecast by 20.4% and 33.5% in FY18 and FY19 with expectations of healthy interest income on significant cash balance driving the material revisions.
An extraordinary dividend is a strong possibility
We believe the excess cash obtained from the rights issue will lead to Unilever ending with a net cash balance of NGN29.8bn in FY17E and NGN31.2bn in FY19E. With management not disclosing any major expansion CapEx plans for FY18 and the Blue Band plant in Agbara completed and commissioned in December 2017, CapEx should moderate to depreciation from FY18. We, therefore, cut our modeled CapEx to match depreciation in FY18-22.
This, therefore, supports the strong cash-build which we see for Unilever in FY18-22 with FCF forecast to post 25.7% CAGR. Unilever’s management is now faced with the decision of what to do with the excess cash from the rights issue and the expected build-up from FCF. We have modelled that it continues to earn interest income which is the main driver of our earnings revision estimates in FY18 and FY19. There is the risk that it could pay extraordinary dividends in FY18 as we now estimate it will end FY17 and FY18 with net cash/equity of 38.9% and 40.6%, respectively.
FY17 results – what do we expect?
Ahead of Unilever’s FY17 results release, we forecast FY17 sales growth of 35.7% YoY and net profit growth of 112.6% YoY. We expect EPS (diluted for the additional 1.9bn shares issued in recent capital call) to grow by 94.7% YoY to NGN1.58. Thomson Reuters consensus forecasts FY17 EPS of NGN1.56 which is 1.3% below our forecast. Further out we forecast EPS CAGR of 15.8% in FY18-22.
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