Headwinds stunt Unilever growth prospects

Unilever Nigeria plc, a firm in the fast moving consumable goods sector, has been grappling with macro-economic challenges as 2014 financial results showed the company taking a hit at both topline and bottomline.

For the year ended December 2014, Unilever’s profit after tax dropped by 49 percent to N2.41 billion from N4.72 billion the same period of corresponding year (2013), while sales fell by 7 percent to N55.75 billion.

The foundering performance of the consumer goods giant is attributable to the security challenges in Northern part of the country and intense competition combined with the naira volatility.

Nigeria, Africa largest economy, has been under serious attack from the implacable Boko Haram, a group that has killed more than 12000 people as it seeks to establish an Islamic state in the region.

This incessant attack has hindered manufacturing companies from pushing their products into the crisis region.

The squeeze in consumer wallets caused by fuel hike of 2012, which affected consumer discretionary spending also contributed to weak sales of consumer goods firms.

“Nigerian consumer goods names are still experiencing a challenging time given the insecurity in Northern Nigeria, competition in Southern markets and continued pressure on consumer spending,” said Kingston Nwosu, equity research analyst with FBN Capital in an emailed note.

Nigeria’s inflation rate rose for the third consecutive month to 8.4 percent in February, from 8.2 percent the previous month, partly driven by increases in prices of imported food items, according to the statistics bureau.

Also dampening Unilever’s performance is intense competition for some of its products such as Omo washing powder, Key soap, Royco bouillon, Lipton tea, Blue Band margarine.

Further analysis of the Unilever’s 2014 financial statement showed input costs reduced as cost of sales fell by 5 percent, while cost of sales ratio remained flattish at 63 percent.

However, operating expenses increased by 6 percent to N15.56 billion as against N14.63 billion in 2013, while finance costs moved by 65 percent as the company introduced new product to capture a greater share of the market.

“Unilever introduced Rexona and Pepsodent into the Nigerian market in the first half of the year. We believe this led to high marketing costs initially, but suspect that the company may be easing off on this given the deteriorating macro environment,” said Nwosu.

Unilever has so much in its capital structure as debt ratio spiked to 215 percent in 2014 from 68 percent in 2013. The higher the debt equity ration the more a firm is vulnerable to financial risk.

Furthermore, total borrowing in the balance sheet increased by 152.90 percent to N16.11 billion.

Unilever’s net margin, which measures the profitability and efficiency of a firm ,reduced to 4.32 percent in 2014 from 7.86 percent in 2013. Gross profit where down by 9.34 percent to N20.17 billion.

Total assets were up by 4.52 percent to N45.73 billion compared with N43.75 billion in 2013.

Return on equity (ROE) increased to 32.26 percent in 2014 from 50.53 percent in 2013, which means the company is not using shareholders resources to generate higher profit.

Unilever declared a DPS of 10 kobo, which implies a dividend yield of 0.3 percent and a payout ratio of 13 percent. Unilever (parent) announced its intention to acquire via a tender offer up to 944,465,532 (about 25% of total shares outstanding) shares of Unilever Nigeria plc at a price of N45.50.

Analysts say an end to the insecurity in the North part of the country will enable these firms tap into the Nigeria large market.

Nigeria rising population and burgeoning middle-class that crave for consumption is expected to be a major driver of growth for FMCG firms in Africa’s largest economy Nigeria.

The company’s share price closed at N44.45 on the floor of the exchange, while market capitalisation was N168.16 billion.