Overview: Unilever's bottom line in Q1 17 dropped significantly by ~53 per cent on account of heightened raw material cost and the sharp depreciation of the local currency that occurred during the reporting period prior to the government reading its budget. Consequently, core operating margin declined from 14.8 per cent to 6.8 per cent whilst other profitability indicators including net profit margin, gross profit margin, return on assets and return on equities followed suit in a downward trajectory. Unilever appeared more levered in Q1 17 compared to the prior period as finance cost increased significantly and contributed to the drag in bottom line performance. The negative consequence of the aforementioned can be seen in its interest coverage ratio with the figure dropping significantly from 132x to 10x. Turnover however increased significantly during the period and we believe that this narrative coupled with the rebound in broad economic activity would support the company's growth in the quarters ahead.
Revenue: Efficient execution of Q1 growth plan, brand loyalty as well as improved consumer and business sentiment helped revenue grow by ~9 per cent from, GHS 127M to GHS 138M.
Cost of Sales: Cost of sales increased much more aggressive than the overall domestic price levels as measured by CPI on account of increased raw materials and local currency depreciation that ensued during the Q1 period, despite the local currency ending the quarter on a positive note.
Negative bottom line growth: Profit before and after tax lost about 55 and 54 per cent of their value respectively. Increased opex, cost of sales as well as forex depreciation accounted for this decline.
Balance sheet: Unilever dropped its dividend payout ratio to a historical low of 8 per cent for the 2016 period and we believe this move is meant to reinvest a significant portion of its earnings into the business in order to mitigate the negative impact of interest bearing facilities on its books.
Going forward – key issues in FY 2017: Improved inflation rate and the downward trajectory in interest rates should increase disposal incomes of consumers and that should drive topline performance of the company. In addition, a stable FX regime would help control production cost and that should filter into improved bottom-line performance.
Source: Frontline Capital Advisors
