28 July 2022

UNIL HY2022 Results: Two Sides of the Same Coin

In brief

Unilever Plc. (“UNIL”) released its unaudited HY2022 financial results yesterday posting a loss of GHS 9.0m owing to weak revenue performance, a surge in restructuring cost and an increase in finance expenses. While we were surprised by UNIL’s control of cost of sales and operating expenses, we were disappointed to see revenue increase marginally by 1.6% y/y despite UNIL’s implementation of price increases across most of its brands. This signals to us that the prevailing inflationary pressures have had some impact on UNIL’s sales volume.

Performance: Weak revenue performance but efficient cost control 

  • UNIL’s net loss increased by 36.1% y/y to GHS 8.0m in HY2022, on the back of weak revenue performance, a surge in restructuring costs and an increase in finance costs
  • UNIL’s revenue increased marginally by 1.6% y/y to 304.7m. We believe this subdued revenue performance is due to lower sales volume, as UNIL implemented upward price adjustments across most of its brands in HY2022
  • Despite the prevailing inflationary pressures, UNIL kept its cost of sales under control, increasing marginally by 0.2% y/y to GHS 241.6m
  • With cost of sales controlled, coupled with upward price adjustments, gross margin improved by 1.1pp to 20.7% y/y
  • Operating expenses also increased marginally by 4.1% y/y, led by restructuring cost which increased a little over ninefold (+939.8% y/y) to GHS 7.7m
  • Resultantly, operating loss narrowed by 54.9% y/y to a loss of GHS 2.8m. Operating loss margin improved by 1.2pp y/y, declining from -2.1% in HY2021 to -0.9% in HY2022
  •  Finance costs increased a little over thirteenfold (+1,332.8% y/y) to GHS 6.8m, as bank overdraft jumped from GHS 19.3m in HY2021 to GHS 85.8m in HY2022. (+345.5% y/y)
  • Consequently, net loss margin increased by 0.75pp, from -2.2% in HY2021 to -2.9% in HY2022

Outlook: Inflationary pressures to weigh on sales outturn, while gross margins improve on cost-saving strategies

  • We expect the rising inflationary pressures and the growing competition in the FMCG industry to weigh on UNIL’s sales volume outturn in the near term
  • Our gloomy outlook is hinged on the basis that, the prevailing inflationary pressures will squeeze consumers’ disposable income, causing them to seek out cheaper alternatives in a highly competitive market
  • However, we expect UNIL to aggressively pursue the necessary marketing initiatives to help drive sales. This will also impact the company’s branding and marketing expenses in the coming quarters
  • Despite the above, UNIL’s aggressive cost-cutting measures have been effective in both quarters of the year. Moreover, UNIL has reduced its distribution costs by 12.7% y/y and increased its operating efficiency by 1.0pp, by switching to a demand-based distribution model for key distributors and engaging in secondary sales
  • In subsequent quarters, we expect these cost-cutting measures coupled with price increases to improve gross margins

Valuation: Under Review 

  • UNIL is currently trading at a P/Sales of 1.21x, and we intend to re-initiate coverage in 2H2022