Equity Research Report

NIGERIA

Unilever Nigeria Plc: Interim Results Q3, Sept. 2011

November 18, 2011
Ticker Sector Sub- Sector Date of Incorporation Date of Listing Year End No of Ordinary Shares Capitalisation (N) % of Market Cap. 52-Week High (N) 52-Week Low(N) YTD Return (%) 52-Week Avg. Trade Beta Value Current EPS (N) Current PE(x)

HOLD

Fair Value: NGN 27.32

UNILEVER Consumer Goods Personal/Household Items April 11, 1923 September 1973 December 3,783,296,000 98,365,696,000 1.53 31.25 22.56 0.74 989,341 0.87 1.32 19.65

Current Price: NGN 26.00 Growing and Creating Value:

The unaudited Q3, 2010 result of Unilever Nigeria Plc for the period ended September 31, 2011 shows that its Turnover (TO) grew by 18.85% to N40.42bn, compared with N34.21bn in the corresponding period of 2010. Profit Before Tax (PBT) increased by 20.85% between Q3 2010 and Q3 2011 to N5.80bn from N4.80bn. The tax provision also increased by 11.18% between 2011 and 2010 to N1.73bn from N1.56bn which resulted in the Profit After Tax (PAT) of N4.10bn, up from N3.24bn in Q3 2010, representing a growth of 25.52%. The PBT Margin in Q3, 2011 increased over the Q3, 2010 and over the FY, 2011 figure. The PBT margin increased to 14.34% in Q3, 2011 from 14.02% as at Q3, 2010, and up from 13.68% as at the end of the financial year in December, 2010. PAT margin currently stands at 10.06%, up from 9.47% in the corresponding period of 2011, and also up from 8.93% as at FY 2010.

Valuation/Analyst Recommendation We maintain our previous forecasts for the companys top line and bottom. We used two valuation methods which are Discounted Future Earnings (DFE) and Discounted Free Cash Flow (DCF). We project Turnover, Earnings Before Interest and Tax (EBIT), Earnings Before Interest Tax Depreciation and Amortization (EBITDA) and Profit After Tax (PAT) for the periods ending December 2011, 2012, 2013, 2014 and 2015. We estimate Turnover of N60.15bn, N74.58bn, N90.62bn, N108.29bn and N129.41bn respectively. We estimate EBIT of N12.27bn, N15.22bn, N17.06bn, N19.93bn and N23.81bn, and EBITDA of N13.31bn, N16.32bn, N18.21bn, N21.14bn and N25.08bn for the same period. Looking at our estimate of the capital expenditure of the company within the forecast period and the notional tax on EBIT and adjusting for the net working capital, we arrived at Free Cash Flow (FCF) of N9.72bn, N11.99bn, N13.81bn, N16.04bn and N19.21bn. We forecast PAT of N6.92bn, N9.32bn, N11.33bn, N12.18bn and N14.56bn. Using a dividend payout of 90% for the period, we arrived at Dividend Payment of N6.23bn, N8.39bn, N10.19bn, N10.96bn and N13.10bn which translates to Dividend Per Share (DPS) of N1.65, N2.22, N2.69, N2.90 and N3.46 respectively. We applied a terminal growth rate of 7.72%. We used a beta value of 0.87x based on the 5-year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE ASI). We used 12.19% as our risk free rate, which is the average of the one year marginal rate on 5 years Federal Government of Nigeria Bond, and a Risk Premium of 8.00%. Applying foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 19.16%, which is our cost of capital. Using 3.78bn shares in issue, the DCF Model generates N30.53 per share and the DFE Model generates N23.39 per share. Applying a weight of 55% to the DCF and 45% to the DFE, we arrive at a value of N27.32 per share, which is our fair value. Buying the stock at the current market price of N26 holding it to our fair value of N27.32 and adding the present value of the 5-year forecast dividends, investors will earn a total return of 34.46%. Relating this return to the Ke of 19.16%, investment in Unilver shares at the current market price will record alpha return of 15.31%. The 2011 forward dividend yield based on our fair value generates 6.02%.The expected return is lower than the current return on shortterm risk free assets in the market, we therefore placed a HOLD on the shares of Unilever at the current market price.

This result also indicates that the percentage of TO, PBT, and PAT in the Q3, 2011 to the Audited TO, PBT and PAT for the period ended December, 2010 are: 86.34%, 90.57% and 97.30%, respectively. Given the current run rate, Unilever should surpass the previous years performance with wide margin. A cursory look at the balance sheet position as at Q3, 2011 compared with the position as at FY 2010 showed that the companys fixed assets recorded a marginal increase. Fixed assets increased by 16.19% to N13.64bn from N11.74bn in FY 2010. Cash and bank balances recorded an increase of 1.65% from N2.67bn in FY 2010, to N2.72bn in Q3 2011. Other debit balances improved by 66.61% to N4.10bn in Q3 2011 from N2.42bn in FY, 2010, while other credit balances also increased by 23.98%, to stand at N16.70bn from N13.50bn. Stocks increased by 3.81% to N6.53bn from N6.29bn during the review period. The trade debtors decreased by 23.47% to N1.67bn from N2.18bn, while trade creditors increased marginally by 0.08% to N3.658bn in Q3, 2010 from N3.655bn as at FY 2010. However, the Net asset for the period dropped by 1.14%, and was put at N8.24bn, from N8.34bn, while there were no short term borrowings during the period under review. A review of the manufacturing industry in Nigeria shows the industry is relatively small in relation to the size of the domestic economy. The sector has not grown remarkably over the years due to a series of factors: the neglect of the sector in favour of oil; an epileptic power supply; and the countrys deficient infrastructure; among others. Although the Nigerian government maintains that the industry is the main instrument of rapid growth, structural change and self-sufficiency, it has not yet pursued the necessary policies to improve the performance of the manufacturing industry. We however commend the ongoing efforts of the CBN to make soft loans available to Small and Medium Scale Enterprises (SMEs) and the governments proposed privatization of the Power Holding Corporation of Nigeria (PHCN). Some quoted manufacturing companies, especially those with highly capitalized stocks, managed to show impressive performance as the economy continues on the path of recovery, after the global economic and financial meltdown. The fact that some FMCGs have low-income elasticity of demand to economic factors helped to insulate the revenue of operators. However, we note the possible negative impacts of the current high unemployment rate of 23.9% on the aggregate purchasing power in the long run. Over the years, Unilever has been a socially responsible and responsive organisation that takes strategic actions for the improvement of its host communities and environments. The company has made provisions for assistance in fields of health, education/children welfare and portable water/hygiene as part of its social responsibility programme in Nigerian communities. In addition, it has embarked on a programme of restructuring in a bid to re-energize itself and deliver fully on its promises to its various stakeholders. In addition, the company has sharpened its focus by introducing the Vitality Mission, which stands to ensure that in all it does it is adding vitality to life for everyone. The company has strengthened its connection with its customers, landed innovations, invested in higher production capacity, consolidated benefits from its manufacturing site rationalization, which was implemented in the middle of 2008, and delivered cost savings. Unilever intends to continue to leverage on its improved capability via looking for cost saving opportunities to make the company leaner and agile, fit to compete and to adapt to a changing operating environment. This is critical to the company in order to deliver sustainable growth and profitability. In order to gain market acceptance and delight its various customers, the company has embarked on the following: Invested more in advertising and promotion of its brands, Invested in capacity expansion and modernization, supported its customers to secure financing during credit squeeze, Invested in capacity expansion and repackaging of existing products and has also launched additional products. These initiatives are now producing the rights results. As at December 31, 2010, the total assets of Unilever were financed by a mix of equity and liabilities in the proportion of 32.14% and 67.86%, respectively. As at December 2010, the total assets of Unilever stood at N25.94bn, while total liabilities stood at N17.60bn. The short term liabilities stood at N14.40bn, accounting for 81.79% of the total liabilities, while the long-term liabilities stood at N3.20bn accounting for 18.21% of the total liabilities. Unilevers principal activities involve the manufacturing and marketing of foods ingredients and home and personal care products. The company has strong portfolio of brands that are popular across the country. Its strong roots in local markets and first-hand knowledge of local culture have enabled it to consistently produce quality products desired by its customers. Its product lines are classified into two: Home & Personal Care - Lux Beauty Soap and Lux Diva Mix, Lifebuoy Toilet Soap, Close-Up Toothpaste and its variants, OMO, Sunlight Detergent, Pears Baby Range and Vaseline Petroleum Jelly; and Food Products Knorr Cubes, Royco Cubes and Royco Goat Meat Flavor, Blue Band and Blue Band Deli, Annapurna Salt and Lipton Yellow Label Tea. These products command strong demand in the market and are less affected by adverse economic situation because they are all necessities.

Business Description
Unilevers principal activities involve the manufacturing and marketing of food products/ingredients as well as personal care products

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Comparable Analysis (Nmn) Company TO Unilever 46,807 PZ Cussons 65,878 UACN 52,314 Financial Performance (Nmn) Q3 2011 Turnover 40,415 PBT 5,797 PAT 4,067 PBT Margin (%) 14.34 PAT Margin (%) 10.06 PBT 6,152 8,026 7,094 Q3 2010 34,207 4,797 3,240 14.02 9.47 PAT 4,181 5,697 5,450 % 18.15 20.85 25.52 0.32 0.59 PAT Margin (%) 8.93 7.92 10.42 FY 2009 44,481 6,129 4,093 12.73 9.20 ROE (%) 50.16 12.67 8.76 FY 2010 46,807 6,401 4,180 13.68 8.93 EPS* 1.32 1.75 7.03 % 5.23 4.44 2.13 (0.95) (0.27)

NIGERIA
PE* 19.65 17.13 4.20 FY 2011F 60,148 10,172 6,917 16.91 11.50

Source: Company Annual Report: Unilever & UACN (FY December 2010); PZ Cussons (FY May 2011)

Directors Shareholding as at December 31 2010

Director Apostle H.I. Alile Mr. Thabo Mabe Mr. A. Mamvura Mrs. G. Oluoch Mr. J.K. Wandawanda Chief. S.I. Adegbite Igwe N.A. Achebe Mallam Abba Kyari Mr. Atedo Peterside Mr. P. Sykes Sen. Udoma Udo Udoma Mrs T. Agiri Mr. K. Boateng Position
Chairman Mgr. Director/CEO Ex-Director Ex-Director Ex-Director Non Ex-Director Non Ex-Director Non Ex-Director Non Ex-Director Non Ex-Director Non Ex-Director Non Ex- Director Executive Director

No of Shares
6,250 Nil Nil Nil Nil Nil 55,976 68,084 5,000,000 Nil 1,637,500 Nil Nil

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