Monday, February 27, 2017 6:45 PM/ ARM Research
Recently, the share price of UAC of Nigeria Plc (UACN) succumbed to bearish sentiments, hitting an eight-year low of N12.02 on the 23rd of February 2017. The scale of the sell-offs placed UCN among a handful of stocks which have lost at least 80% of their value over the last three-years.
Interestingly, the down-leg comes despite upbeat fundamentals, with 9M 16 EPS up 43% YoY and current P/E (diluted) multiple trading at significant discount to EMEA peers at 7.03x.
In this report, we review the cause of the renewed selling pressure on UACN shares and how it affects the operating performance of the company.
UPDC profit warning stokes bearish sentiment
As most companies are now in their closed period ahead of audited FY 16 results, the only news of interest on UACN is last week’s profit warning by its real estate subsidiary, UAC Property Development Company (UPDC).
UPDC links expected earnings pressures to impairment losses from ongoing JV projects, higher borrowing cost and negative performance of its hotel business. We think the announcement is reminiscent of the company’s sour FY 15 results, wherein valuation losses at UPDC dented UACN’s financial performance.
Since the recent announcement, UPDC’s shares have lost 15% while the falls in its parent’s shares have been steeper (-20%).
Figure 1: Trend in UACN’s share price
Potential impact of the write down on UACN results
Given UACN’s controlling stake in UPDC, losses are consolidated and we think the market likely responded to this event given recent history. Only in 2015, UPDC announced N2.1 billion write down on its N16.5 billion investment property.
Assuming impairment levels are of a similar scale as in 2015, we project an impairment charge of N2.2 billion for UPDC. Incorporating the UPDC impairment into our FY 16 earnings expectations for UACN implies a 15% YoY earnings contraction to N4.4 billion (-15% YoY) which is a turnaround from 9M 16 (PAT: +41% YoY).
For context, we run a sensitivity analysis to explore the scale of potential impact to earnings based on expected impairment.
Table 1: Estimated impairment charge
Sell-off looking overdone
Whilst the bearish sentiment on the share price of UACN appear justified, we think investor reaction to projected weak earnings at its struggling real estate business (10% of revenues) overlooks the positives from UACN’s other businesses.
First, despite the challenging economic activities (subdued consumer income and rising input cost), UACN has kept operating margin largely unchanged (9M 16: 7.4%, 9M 15: 7.7%) largely due to price hikes to support profitability at its food and agro allied businesses. To add, the company has no FX liability exposure and its key food and agro-allied business (75% of turnover) stand to benefit from ongoing FG policy focus on import substitution.
Indeed, incorporating the impact of the impairment charge lowers our FVE to N15.95, which offers 27% upside from its last closing price. On a multiples basis, UACN is trading on a 2016E diluted P/E of 13.4x which is at discount to 5-year trend average (21.4x) and that of its Bloomberg EMA peers (18.5x).
Figure 2: Price to Earnings Ratio
Summary of Results and Forecasts - Naira (N)
ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price.
We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group.
The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization.
For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
1. UPDC Plc Announces Full Year December 2016 Earnings Guidance
2. UAC of Nigeria Q3 2016 Results Review - Outperfom Rating Maintained
3. UACN Records 42.41% Profit Growth in Q3 2016 Result,(SP:N19:20k)
4. UAC of Nigeria Q2 2016 Results Review: Outperfom Rating Maintained
5. UACN Records 12.36 Profit Decline in Q2 2016 Result SP N20 73k
6. UAC of Nigeria Plc Records 12% PBT Growth in Q2'16 Results
7. UACN PBT PAT Both Down by 23 19 YOY as Net Finance Costs Up by 18
8. UACN Records 21.61% Profit Decline in Q1 2016 Result,(SP:N19:00k)
9. UACN: A tweak in strategy - sign of the times
10. UACN: Struggling Real Estate Business Drags Earnings Lower in FY 2015 Results
11. UACN Gross Margin Expands by 258bps in Q4’15; Shares Rated Outperform
12. UACN Records 52.64% Profit Decline in 2015 Audited Result,(SP:N20:48k)
13. UACN Difficult market terrain weighs on outlook Shares Rated Outperform
14. Sen. Udoma Udo Udoma and Dr. Okechukwu Enelamah Resign from UAC Board Effective 12th November
UAC - Q3 2015 results reveal decline in PBT reflect weak sectoral performance
UACN Records 79.4 Profit Decline in Q3 15 Result SP N26 48k
UACN Appoints Messrs Ernst Young as the new External Auditors as Messrs PWC retires
UACN Announces Proposal to Raise Capital