Introduction
The 2016 financial year was a great one for Unilever Nigeria Plc. It was well able to step up the level of its business activities, and also recorded profitability ratios that were mostly a progression over the preceding year’s. Profit margin improved, as did return on assets and return on equity.it is equally important to note that the company’s results were not just mostly better than those of the prior year, but they could also compete against the industry standards for 2016.
We predict that the 2017 financial year will be a better one for Unilever than 2016 was, because we are expecting it to sustain the growth momentum into 2017. Already, its 2017 half year results show a further improvement.
New investors will however find it difficult to buy into the company because its shares are quite expensive. What more, they are currently overvalued.
Core operations
Unilever had a relatively good year in 2016 operation-wise. First to experience an increase was the company’s gross earnings. Gross earnings for the year stood at N69.8 billion, and this was about 17.9 per cent higher than the N59.2 billion recorded in the preceding year. This 17.9 per cent growth rate is as compared to a growth of rate of 6.3 per cent in 2015.
Because direct costs grew a little faster than the rate at which turnover operating expenses (when compared with the preceding year’s) then had a buoying effect on the conglomerate’s profit.
Unilever had a pre-tax profit of N4.1 billion, 127.8 per cent higher than the N1.8 billion pre-tax profit recorded in the erstwhile year. This 127.8 per cent growth rate is also as compared to a pre-tax profit decline rate of 39.3 per cent in the preceding year.
After-tax profit also grew over the preceding year’s by 158.3 per cent, closing at a whopping N3.1 billion, while distributable profit was N3.8 billion.
Earnings per share (EPS), at 81 kobo, was unsurprisingly higher than that of the prior year. This EPS was 153.1 per cent higher than the 32 kobo recorded before. The company then declared a dividend of 10 kobo, same as the 10 kobo declared in 2015.
Profitability ratios
The company performed better in 2016 than it did in 2015 in terms of return on assets (ROA) and return on equity (ROE). ROA for the period under review was 5.7 per cent while ROE was 26.7 per cent, both better than the ratios of 3.6 per cent and 15.0 per cent respectively in the preceding year. Analysis shows that the company made a pretax profit of N5.70 on all N100 assets deployed an after tax profit of N26.70 on every N100 worth of equity employed. These high ratios indicate a superior management of key assets.
The company’s ability to squeeze as much profit as is possible from revenue earned improved during the course of the year. Profit margin improved to 5.9 per cent in 2016 from 3.0 per cent in the erstwhile year.
The company’s total number of employees dropped to1, 207 from 1,248 in the preceding year. Earnings per employee then improved to N57.82 million on the average, up from N47.43 million in 2015. This is indicative of employee productivity and company efficiency.
It is however important to note that not only were Unilever’s results better in 2016 than they were in 2015, the results are still competitive against industry standards.
Other ratios
For the 2016 financial year, Unilever’s equity could finance a higher proportion of its total capital than it could in the preceding year, and this means that the conglomerate’s capital adequacy was more robust than that of the prior year. The result for the year was 61.4 per cent, higher and therefore better than the 51.6 per cent recorded in the erstwhile year. The result recorded however was also on par with what was obtainable in the industry for the period under review.
Unilever performed slightly better in 2016 than it did in 2015 in terms of liquidity ratios. First, it was better able to convert assets into needed funds more quickly than it did in 2015. Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was 0.8 times, higher than the preceding year’s 0.6 times result, but not as high as what was generally obtainable in the industry.
Having a debt to equity ratio of 1.92 indicates that the company is using N5.24 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using a total capital of N6.24 for every N1.00 of equity capital.
Sustainable growth
For the review year, the company recorded a distributable profit of N3.8 billion. It dedicated N378 million of this to dividend and retained N2.722 billion. It therefore had a retention ratio of 0.88, and this was slightly higher than it did in the past year.
With a profit margin of 5.9 per cent, an asset turnover of 0.96 times, and an assets/equity ratio of 6.24 times, the company had a sustainable growth rate of 31.1 per cent for the period under review. This means that the company had a 31.1 per cent inherent capacity for growth during the course of the year, an improvement over the 18.9 per cent result recorded in 2015.
For the year under review, actual growth was 17.9 per cent, falling below the sustainable growth, an indication that the company did not achieve its inherent potential for growth during the course of the year.
Stock value
Our analysis shows that the Unilever stock is expensive, and overvalued at its current market price of N40.00. As at the analysis date of September 7 2017, net assets per share was N1.91, and this was just but a tiny fraction of the current market price and suggests overvaluation.
The company is also worth much less in its books than it is selling for on the NSE at now, as shown by a lower book value as compared to its market value. While book value is N11.7 billion, current market capitalisation is an astronomically higher N242.1 billion. This also, is a sign of overvaluation.
We do not recommend a buy for investors at this point.
2017 half year result
Unilever’s 2017 half year result shows a much more commendable improvement over the corresponding period in 2016. Thus, its 2017 financial look like it’s shaping up to be a great one for both company and its shareholders. Not only did the conglomerate record a higher turnover than the corresponding period in 2016, its pretax profit and after tax profit for the period were also much higher than those of the prior year.
While pre-tax profit grew by 233.3 per cent to N5 billion, after-tax profit grew by as much as 236.4 per cent to N3.7 billion. If the company were to maintain the status quo till the end of the year, we predict that the 2017 financial year will end on an even better note for Unilever than 2016 did.
Unique strategies
Unilever was established in 1923 as a soap manufacturing company called West Africa Soap Limited by Lord Leverhulme. It later became known as Lever Brothers Nigeria. Today, it is the longest serving serving manufacturing organization in Nigeria.
After a series of mergers and acquisitions, the Company diversified into manufacturing and marketing of foods and personal care products. These mergers and acquisitions brought in Lipton Nigeria Limited in 1985, Cheesebrough Industries Limited in 1988 and Unilever Nigeria Limited in 1996. The Company changed its name to Unilever Nigeria Plc. in 2001 in line with the global strategic direction of the business
Conclusion
Unilever was one of the few Nigerian companies that recorded a commendable profit in 2016. This is to be commended. The average investor might however not have the necessary financial leverage to buy into the company because it is an expensive stock.
*Source: Unilever’s 2016 financial report
*The Nigerian Stock Exchange