Unilever Nigeria is headed for a profit drop for the second year and that could lead to the worst profit record in the past five years. The conglomerate is losing sales revenue in the current year after it managed to step up growth in 2013. Profit margin is down to the lowest level in many years, as costs aren’t moderating sufficiently to compensate for the slacken revenue performance.
A drop of 41% in profit in the first quarter is indicating the company may see a more rapid drop in profit this year than it recorded in the preceding year. Mr. Thabo Mabe, who heads the company didn’t grow wealth for shareholders last year and therefore failed to match the N1.40 per share dividend paid for 2012 operations. He looks very likely to lose even more money for investors this year, indicating that dividend may drop also for the second year.
At the end of the first quarter in March, the company posted an after tax profit of about N751 million. This is a drop of about 41% from the corresponding first quarter profit figure in the preceding year. If the current growth rate is maintained, after tax profit is expected to be in the region of N3.7 billion for Unilever Nigeria at the end of 2014. This will be a drop of 23.1% from the net profit figure of N4.81 billion the company posted at the end of 2013.
The 2013 profit figure for the company was a decline of 14.1% from the peak profit figure of N5.60 billion earned in 2012. A drop in profit for the second year is indicated for the company based on the first quarter performance and that could lead to the lowest profit figure seen any time since 2009.
The company closed the first quarter with sales revenue of N13.83 billion, a moderate decline of 2.8% from the corresponding revenue figure in 2013. Based on the first quarter growth rate, turnover is projected at N57.8 billion for Unilever Nigeria in 2014. This will be a decline of 3.7% from the company’s peak sales revenue figure of N60 billion in 2013. The company has been able to maintain a continuing growth in sales revenue in the past five years and this trend may be broken in the current year if the current growth rate is maintained to full year.
Profit is dropping well ahead of revenue, which is an indication that costs aren’t coming down reasonably enough. This has led to a significant loss of profit margin. Net profit margin went down from 8.9% in the first quarter of last year to 5.4% at the end of the first quarter of the current year- the lowest margin in several years. This is a continuing decline in profit margin from 10.1% in the 2012 full year to 8.0% at the end of 2013.
Two major cost elements seem to be out of management’s control and they are responsible for the sharp fall in profit margin. These are distribution/administrative expenses and interest charges both of which claimed significantly increased proportions of sales revenue during the first quarter. Distribution/administrative expenses grew by 32% to N3.82 billion in the first quarter against the decline in sales revenue during the period. It claimed an increased share of sales revenue at 27.5% compared to 20.3% in the corresponding period last year.
Interest expenses also grew significantly at 30% to over N381 million against the decline in turnover during the period. Rising balance sheet debts account for the growing interest expenses in the current financial year. At the end of the first quarter, long-term borrowings rose by 48% to N1.15 billion over the end of 2013 figure. Bank overdraft has also risen by 36% to N3.5 billion over the same period. Worsening cash flow position of the company has compelled it to get deeper into debts.
Cash balances dropped by 35% to N2.05 billion in the first quarter, as net cash flow from operating activities was a negative figure of N91.6 million compared with a net cash generation of N974 million in the first quarter of last year. Net cash used for investing activities dropped by 47% but net cash used for financing activities grew by 35.7%. There was a net decrease in the company’s cash resources to the tune of N2.06 billion in the first quarter.
The company earned 20 kobo per share in the first quarter, down from 33 kobo in the corresponding period last year. Based on the projected profit for the year, Unilever Nigeria is expected to earn 98 kobo at the end of 2014. This will be a drop from the N1.27 per share it reported for its 2013 full year operations. The company paid a dividend of N1.25 per share for the 2013 operations, which is likely to drop in the current year unless earnings growth is significantly improved in the subsequent interims.
For the company to be able to achieve the same 8.0% growth in revenue it recorded last year, it will need to realise a minimum sales revenue of N17 billion in each of the remaining three quarters of the year. In order to keep after tax profit at the 2013 level, the company also has to earn a minimum of N1.35 billion in after tax profit in each of the remaining quarters.
