Wednesday, September 11, 2019
/ 09:31AM / by United Capital Research
Recently, UAC of Nigeria Plc (UACN) alongside its subsidiary, UAC Property Development Company Plc (UPDC), jointly announced plans to raise equity capital worth N15.96bn via a rights issue to recapitalise UPDC and subsequently unbundle UACN's shareholding in UPDC. Additionally, the post-capitalised UPDC will unbundle its holding in the UPDC Real Estate Investment Trust (UPDC REIT) leading to the emergence of three standalone entities - UACN (ex-UPDC), a standalone UPDC and a standalone REIT company (UPDC REIT).
Currently, UACN holds a 64.2% stake in UPDC. Similarly, UPDC controls 61.77% of UPDC REIT. Following the completion of the rights issue, UPDC would unbundle its stake in UPDC REIT to UPDC shareholders (including UACN) in proportion to their post right issue holdings in UPDC. Also, UACN would thereafter unbundle its shareholding in UPDC to its shareholders on a pro-rata basis.
According to the transaction circular, the objectives of the unbundling exercise are that
1.) UPDC will no longer own any units in the REIT,
2.) UPDC REIT will cease to be an associate company of UPDC,
3.) UPDC shareholders will become direct unitholders in the UPDC REIT in addition to their shares in UPDC,
4.) UPDC will cease to be a subsidiary of UAC and
5.) UAC shareholders will become direct holders of shares in UPDC and units in the UPDC REIT.
Source: Company Filing
The impact of the restructuring on UACN: UPDC has been a clog in the wheel for the UACN. In FY-18, UACN's bottom line was dragged by the impact of the impairment losses of N10.2bn (N8.9bn was from the real estate business). Thus, if the proposed unbundling exercise is successful, we believe this will remove the current pressures emanating from UPDC in UACN's book, making it more attractive going forward. In all, we believe the unbundling is positive for UACN, as we expect revenue growth in Paints, Logistics, and Food businesses to drive the standalone UACN (ex-UPDC).
The impact of the restructuring on UPDC: Since 2016, UPDC has generated losses on account of its heavy debt Burden. Over the years, UPDC sold assets to meet obligations; however, given the quantum of debt, external injection of capital is required to materially reduce leverage. UPDC historically relied on commercial paper (CPs) issuance to meet its obligations, with total CPs outstanding increasing from N10.4bn in 2014 to N14.3bn by 2018. In 2018, UPDC took mark-to-market adjustments on its portfolio and recorded losses on asset sales, which led to the N8.9bn impairment loss.
However, with management intention to raise N15.96bn in equity (via a rights issue), to eliminate UPDC's N7.25bn short term debts, leaving a remainder N4.26bn (long term debt - corporate bond), finance cost is expected to decline sharply compared to N4.73bn and N1.57bn incurred in FY-18 and H1-19 respectively and lessen the pressure on the bottom-line numbers of UPDC for FY-19.
Yet, much of the current challenges encountered by UPDC are in line with the broad sector challenges, which has been in decline since 2016 as consumer spending on real estate investment are pressured. Thus, further out, with our overall outlook for economic growth to remain sluggish, we are not overly optimistic about the real estate sector growth in the near to medium term amid the absence of bold policy reforms.
The impact of the restructuring on UPDC REIT: UPDC REIT is a close-ended property fund with underlying assets comprising a diversified portfolio of commercial and residential real estate assets. In FY-18, the properties earned a gross rental income of N1.3bn. The REIT also earned interest income of N837mn from cash and short-term investments. Reported PAT was c. N2.6bn (after fair value gains). UPDC REIT paid aggregate dividends of N1.3bn in 2018, a c.10% yield at 5 September 2019.
With the UPDC REIT paying c. N3.0bn in dividends to UPDC since 2016, current and new shareholders of UPDC stand to benefit from constant dividend payment from the profitable REIT after it is unbundled from UPDC while it is expected that the REIT will enjoy increased liquidity and free float.
Where should investors position?
We believe the current transaction, if successful, offers an opportunity for UACN investors to receive shareholding in UPDC and UPDC REITs, post the transaction while enjoying the potential expected upsides on these stocks/units.
Download Here - UACN and UPDC Joint Presentation