Snapshot

H1’18 Revenue down 22% y/y amidst notable weakness in Animal Feeds 

Mixed trend in operating costs drives EBIT margin 91bps lower y/y 

Lower finance expenses offset weaker operating profit, PAT up 14% y/y 

Earnings estimates little changed, HOLD rating reiterated 

Animal Feeds rout persists, small segments record mild recovery 

06 August 2018 ( Lagos ) : UACN released its H1’18 financial statements showing a 22% y/y decline in revenue to N37 billion, marginally behind analyst's N38 billion estimate. Whilst there has been a notable improvement in topline performance of the Paints (+17% y/y), Logistics (+19% y/y) businesses and Packaged Foods (+18% y/y), the major drag to headline revenue remains Animal Feeds, UACN’s largest business segment – down 38% y/y. Amidst the impact of unfavorable market dynamics on both volumes and prices in the segment, UACN has also reported disruptions from the pastoral disputes in Plateau State. Meanwhile, dismal performance of the Real Estate (-46% y/y) business remained driven by lower rental revenue and housing sales. 

Net finance expense moderation supports earnings growth in H1’18 

While Cost of Goods sold declined at a faster pace than topline (-26% y/y vs. analyst's -23% y/y expectation), operating expenses advanced 11% y/y, with OPEX to sales ratio rising 450bps y/y to 15.3% (Vetiva's analysts: 14.7%). As such, H1’18 EBIT declined 30% y/y to N2.7 billion, albeit in line with Vetiva's analysts estimate. Bottom line for the period was however strongly supported by a 57% y/y reduction in net finance expenses, a benefit from the company’s capital restructuring in Q1’18. Supported by this, H1’18 profit before tax rose 15% y/y - in line with analyst's expectation at N2.1 billion. However, following a much lower than expected tax rate of 22% recorded in Q2’18 (Vetiva's analysts: 29%, Q1’18: 27%), profit after tax came in 7% ahead of analyst's estimate. 

Mild earnings forecast upgrade, HOLD rating maintained 

According to UACN’s H1’18 results press release, Management has begun to take decisive steps to reposition its businesses following its strategic review, and the company believes the improvement recorded across a number of subsidiaries in Q2’18 can be partly attributed to these moves. Analysts look forward to an upcoming session with the Management (7th August 2018 Conference Call) to gain further insight into expected plans for its subsidiaries, particularly on moves surrounding the loss-making Animal Feeds and Real Estate businesses. 

Given that major line items printed in line with their estimates, analysts make only modest adjustments to FY’18 forecasts. Particularly, after adjusting analyst's cost estimates, their FY’18 EBIT margin is unchanged at 7.4%, albeit their EBIT estimate is little changed at N6.0 billion (Previous: N6.2 billion) following a marginal downward revision to their revenue estimate. Meanwhile, with UACN’s cashflow further strengthening in Q2’18, following inflow of proceeds from Grand Cereals’ Rights issue, analysts maintain their interest expense estimate for FY’18 amidst the reduced need to fund the working capital intensive business with short term bank loans. 

Overall, analyst's FY’18 profit after tax forecast is revised to N3.5 billion (Previous: N3.2 billion), supported by a downward revision in their tax rate estimate to 26% (Previous: 30%). Analyst's 12-Month Target Price is revised marginally upward to N20.86 (Previous: N20.16), analysts however maintain a HOLD rating in anticipation of any substantial decisions made at the strategic review. 

Business Description 

UAC of Nigeria PLC (UACN) is one of Nigeria’s largest and one of the oldest diversified companies with operations that span the food, agro-allied, real estate, paints and logistics segments. The company runs a holding company business model with majority (controlling) stake investments in ten subsidiaries at present. 

Reporting for EasyKobo on Monday ,06 August 2018 in Lagos, Nigeria

Source: Ifedayo Olowoporoku from Vetiva Capital Management Limited