Material cuts to forecast earnings
Unilever Nigeria’s (Unilever) FY 2019 pretax loss of -N9.8 was far behind our PBT forecast of N295m, following a grossly disappointing Q4. We have therefore made deep cuts to our earnings forecasts. As such, our new target price of N11.9 is now -39% lower. Although we sense that the new management is taking active steps to return the company back to profitability by improving its route-to-market strategy, we foresee one major setback: the wide-ranging impact of the ongoing coronavirus crisis.
Indeed, the slowdown in demand as a result of the lockdown directive in key cities and higher input costs and fx losses due to the weaker exchange rate are likely to wipe off a substantial part of earnings over the coming quarters. Beyond these challenges, it also appears that Unilever is struggling to recover market share lost to competition in Q3. Sales from the Food products and Home and Personal Care businesses in Q4 plummeted by -51% y/y and -63% y/y to N5.1bn and N3.8bn respectively. We have therefore modelled a reduction of -1000bps to our 2020E gross margin forecast to 20% and -700bps to our 2021E and 2022E forecasts to 23% each. We also estimate an fx loss of around -N800m in 2020E.
Essentially, we forecast that Unilever will report a pretax loss of -N1.4bn in 2020E before turning a PBT of N1.3bn in 2021E. Year-to-date, Unilever shares have sold off by -50%, underperforming the broad index by -34%. From current levels, our price target implies an upside potential of 8%. However, given that we expect bearish sentiments to weigh on the stock over 2020-21E period, we maintain our Underperform rating despite the upside potential.
Q4 loss deeper in negative territory
Q4 2019 sales declined significantly by -59% y/y to N8.9bn. Consequently, Unilever posted a gross loss of -N4.9bn for the quarter compared with a Q4 2018 gross profit of N5.4bn. The other key negatives for the quarter were from a 45% y/y increase in opex to N6.3bn and a -51% decline in net interest income to N604m. Pretax loss of N10.3bn in Q4 compares with -N30m loss in Q4 2019.
On a sequential basis, sales were flattish y/y whereas the gross loss for Q4 was 2.9x higher than Q3’s -N1.7bn. Q4 pretax loss therefore more than doubled q/q. Relative to our forecasts, sales missed by -25%, while the pretax loss significantly missed our forecast of -N322m.