22 June 2018 ( Lagos ):

Outperform rating maintained

Following UACN’s weaker-than-expected Q1 2018 results, analysts have cut their 2018-19E EPS estimates by -65% on average (this includes new shares from the company’s rights issue). Analysts take into account growing competition within the Animal Nutrition and other Edibles business (consisting of Grand Cereals and Livestock Feeds) which resulted in a -40% y/y decline in sales to N9.3bn in this business. This segment now accounts for c.51% of group sales vs 64% a year ago and has completely offset gains delivered over the past five years. Management statements indirectly suggest that the coming on-stream of Olam’s animal feeds factory in Q3 2017 has had a more material impact on sales than analysts previously expected.

As such, analysts are more concerned about UACN’s animal nutrition business prospects this year, forecasting a -30% y/y decline in sales to cN40bn. Additionally, analysts expect that relatively high input (grains) costs will continue to weigh on profitability. Analyst’s new price target of N16.2 is down -39%, mainly because of the increase in outstanding shares following the rights issue which has increased total share count by 960 million to 2.881 billion shares. Additionally, they have halved their 2018E EBIT margin estimate for the logistics business to 10% to reflect the tougher operating environment. In Q1, PBT for MDS Logistics, UACN’s logistics business, declined by -13% y/y to N222m following cost increases not recovered from clients.

 Analysts expect this trend to persist in H2 as the firm focusses on new client acquisitions following a drop in activity levels from core FMCG clients. Notwithstanding the outlook, analysts retain their Outperform rating on the stock due to the valuation gap to their fair value estimate. At current levels, UACN shares are trading on a 2018E P/E multiple of 31.9x for an average EPS growth of 27% over the 2018-20E period.

Q1 2018 PBT and PAT both flattish y/y

Q1 2018 results were primarily hit by weaker sales across key businesses. Group sales of N18.3bn declined -25% y/y while PBT and PAT of N974m and N709m (before discontd. ops) respectively both came in flattish y/y. On a segmental basis, sales for the food & beverage business declined by -29% y/y to N14.0bn, driven by lower (down -40% y/y) revenues within the Animal Nutrition business.

A gross margin expansion of +304bps y/y to 19.5% and a -64% y/y decline in net finance charges were the primary drivers behind the recovery in profitability. On a sequential basis, sales declined -10% q/q while PBT was up significantly (+382% q/q). Compared with analyst estimates, sales and PBT both missed by -6% and -37% respectively.

Source: Uwadiae Osadiaye, CFA from FBNQuest Capital Limited.