Unilever in Ghana and Nigeria: Different strokes for the same parent in the same region

Dear Africa interested individuals:
                                                        I am taking a look at Unilever in Africa today with a focus on its subsidiaries in Ghana and Nigeria.  I will briefly mention that Unilever Cote D' Ivoire is also struggling and made a loss as at half-year 2014.  The stock price has declined on the BRVM (regional stock market for french-speaking West African countries) by 27.7%  as at July 24th, 2015.  Now, let me return back to the two markets this article will dwell on: Ghana and Nigeria and focus on their similarities. 

Unilever Ghana and Nigeria both have Ghanaian CEOs.  The Ghana CEO is a female (she was formerly the Marketing Director overseeing 10 African countries for Unilever while based in Ghana) and the Nigeria CEO is a male.  The former came on board in May 2013 and the latter in January 2014.  Both subsidiaries had a decline in operating profit margin from FY 2013 - 2014 by approximately 5%.  Additionally, pre-tax income margin declined by approximately 6% (absolute differential) for both subsidiaries from their levels as at FY 2013 end.  Both companies have liquidity issues (Nigeria's liquidity situation is worse than that of Ghana) with current ratio below one for both subsidiaries for FY 2013 and FY 2014.  That is all for similar numbers generated in the same direction.  Nigeria will be the first subsidiary discussed in detail.  

In July 2012, I wrote an exclusive independent report for a buy-side client on Unilever.  I extract verbatim from the report.  "The company’s stock price has continually run ahead of business fundamentals due to its generous dividend policy and the multinational investor goodwill that persist in the Nigerian financial market.  The company has succeeded in reining in costs to keep profit growth ahead of sales over the past two fiscal years.  Typically cost-saving strategies longevity depends on the operating environment; which presently, is expected to erode the gains of the past two fiscal years.  The company continues to delay payments to its trade creditors to retain cash within the business and reduce its need to borrow while paying out all its earnings in dividend; we deem this unsustainable and when its performance reverses it will be sudden."   

Net income growth pretty much remained flat in FY 2012 and declined 16% from FY 2012 - 2013.  At the beginning of FY 2014, there was a change at the helm of the company; Thabo Mabe was out and Yaw Nsarkoh was in.  Net income further declined 49% from FY 2013 - 2014 and has declined a further 94% from H1 2014 - H1 2015.  There is no other way to call this but a financial performance debacle.  The favorable terms it had with its suppliers (whether by negotiation or strong-arming) has come to an end.  Trade creditors declined 24% from FY 2013 - 2014 after increasing 23% just the year before.  The Nigerian subsidiary played to the gallery in my opinion and is now dealing with the sudden and shocking consequences of its actions and inaction.  Finally at the end of FY 2014, after two consecutive years of a growing decline in retained earnings, management finally heeded my warning and paid out only 10K dividend on earnings of 64K, generating a cover in excess of 6X.  I quote management's comment on the dividend payout for FY 2014.  "The decision on dividend payout was indeed a difficult one.  The Board was caught between delivering shareholders' expectation on dividend and providing the right financing platform for the company to deliver its growth targets."  Companies in Nigeria continue to swallow the pill labeled "managing shareholders" instead of the pill labeled "managing the business."  Managing the business will please shareholders while managing shareholders will lead to long-term pain for short-term gain.

I quote once again from my July 2012 buy-side exclusive independent report on Unilever. 

"The company is clearly taking short-term decisions to maintain investor goodwill and a premium stock price.  These short-term fixes taken today may very well put strains on the company tomorrow which are already evident in Q1 2012.  Something has to give between generous corporate actions which feed into the premium price and reducing burgeoning liabilities that can very well threaten the company’s ability to remain a going concern over the mid-long term.  The company is being smart in managing its funding needs in the interim so as not to negatively impact its income statement.  The die is cast."  That income statement has now been suddenly hit to extreme levels and if the current situation is not nipped in the bud, the company looks set to report a loss for FY 2015 which last happened in FY 2006.  Revenue in Nigeria is back to 2012 level, while earnings and operating profit are back to 2008 levels.  Cost of revenue increased by 400 basis points for Nigeria while revenue declined 7% from FY 2013 - 2014. Cost of revenue for Ghana increased by 500 basis points while revenue rose by 27%.  The increase in cost of revenue by Unilever Ghana generated a boost to revenue while that of Nigeria generated a decline in revenue.  So, what else is happening in Ghana (45 minutes flight from Nigeria?)  Let us go there.  

The Ghana subsidiary of Unilever has already suffered a full-year loss in FY 2014.  Finance costs spiked 164% from FY 2013 - 2014 as total debt declined 5%.  Ghana's current operating environment and during FY 2014 is worse than that of Nigeria though, both are bad situations.  Unilever Ghana is turning the corner while Unilever Nigeria is disappearing around the corner.  As at Q1 2015, Revenue grew 44% and operating profit rose to $4.8m ($1 =3.8Cedi) relative to Q1 2014.  Q1 2015 operating profit is 4.5X the operating profit achieved for FY 2014 and is already 91% of FY 2013 operating profit after just one quarter!  This was inspite of cedi depreciation, high inflation (in excess of 20%,) rising utility costs, drastic decline in consumer purchasing power and an energy crisis.  Management attributed its achievement to strategies employed.  Why are strategies employed in Nigeria not working thus far in a better operating environment than Ghana?  Let me break out their numbers side by side from FY 2013 - 2014. 

                                                                Nigeria                 Ghana              

Sales                                                       -7%                             +27% 

GPM 2-yr avg.                                       36.8%                          24.7%

OPM 2-yr avg.                                      10.6%                          3.6%

Finance costs/OP 2-yr avg.                  28.1%                         62.7%

FAT (2-yr avg.)                                     2.41X                          6.18X

Pre-tax income margin (2-yr avg.)      8.2%                           2.8%

Inventory Turnover                             4.56X                           6.76X

Cost of Revenue (2-yr avg.)                 77%                            84.4%

Free Cash Flow margin (2-yr avg.)    -1%                              +3%

Revenue 5-yr CAGR                            4.5%                            22.7%

Operating Profit 5-yr CAGR              -9.3%                           -37.7%

Quick Ratio (2-yr avg.)                         36.2%                          +51.5%

Debt/Equity (2-yr avg.)                         1.46X                           0.47X  

 For FY 2014, Unilever Nigeria's cash in the bank could not cover its interest payments (0.7X) while that of Ghana could cover its interest payments 2.7X.  Unilever Ghana's debt to equity held constant from FY 2013 - 2014 while Unilever Nigeria's spiked from 0.68X to 2.24X.  As at H1 2015, sales at Unilever Nigeria declined by $2.8m while costs increased by $3.45m.  Sales are declining and the spiraling costs of production are rising!  In addition, management does not appear to be in a hurry to reduce its debt.  Out of a debt burden of $83.9m as at December 31st, 2014; six months on, the company has only paid back $2.3m ($1 = N200) while having free cash flow in excess of $20m as at H1 2015.  The banks that issued the short-term loan to Unilever are definitely smiling as interest piles up.  I need to close this out...

So far, the female Ghanaian CEO is making her presence felt positively especially in her area of expertise, marketing, as sales have blossomed since should took up the mantle of leadership at Unilever Ghana in May 2013.  The male Ghanaian CEO is so far, not making his presence felt as far as the numbers are concerned.  The situation he met on ground in January 2014 has moved from bad to worse.  Meanwhile, the parent company wants to increase its ownership stake from half of the Nigeria subsidiary to three-quarters.  At the current run rate (similar to FY 2014,) Unilever Ghana is expected to have a FY 2015 price-to-earnings ratio of less than 3X at the current price of 7.30 Cedi.  Fort-five minutes flight away, for FY 2015, Unilever Nigeria might not even have an applicable price-to-earnings ratio.  Is this is not a tale of two cities, I do not know what is.  Unilever Nigeria is a more profitable company than Unilever Ghana, but, is less progressive.  Demand for its products has stalled and the company bet on better consumer market dynamics than it is currently faced with.  The flexibility in decision making to make a quick turnaround is apparently also non-existent.     

Ghanaians take heart, your country is matrilineal; women rule on citizenship determination and as far as Unilever is concerned, women rule also.  Two ships were sinking in a rough tide, one ship steadied and has changed its coordinates to get out of the storm, while the other is being tossed by the waves and its hull has been breached.  When and how will it all end for the better?  I am keeping my fingers crossed; please join me.  I saw this coming three years ago.  This is why companies should hire independent consultants on a perennial basis to interpret their numbers for them.  Numbers is a language; we all see them, not all of us can understand what we see.  Choose wisely...   

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