UAC of Nigeria Q1 2021 Results Review: Cost Pressures Weighed on Performance


Thursday, June 10, 2021 / 09:30 AM / by FBNQuest Research / Header Image Credit:  UAC of Nigeria

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4.5% cut to our EPS estimates over the '21-23f period trigger rating downgrade to Neutral

UACN's Q1 '21 results showed that heavy-weighted Grand Cereal, a sub-division of the animal feeds division, and the paints division missed our forecasts by -2.6% and -17.6% respectively. From a PBT perspective, all divisions, except for Livestock feeds, missed our forecasts, on the back of higher-than-anticipated cost pressures across most businesses. Consequently, we have reduced our estimates for FY '21 to capture the trend noticed in Q1 '21.


For sales, we have raised our forecasts for the combined food division (QSR and UAC Foods) by +10% to NGN21.9bn (from NGN19.9bn previously). This follows the trend in Q1 '21, where both sub-divisions outperformed our forecasts by 25.4% (UAC Foods) and 13.7% (QSR) respectively. However, we have lowered the forecasts for the animal feeds & paints divisions by 2.5% and 3.3% respectively, to NGN53.3bn (from NGN54.8bn) and NGN10.2bn (from NGN10.6bn). The changes indicate a total turnover of NGN85.8bn (marginally higher by 0.3% vs. previous estimate) and a gross margin of 20.3% (22.9% previously) for '21f, on the back of a gross profit of NGN17.4bn (NGN19.6bn previously).


Further down the P&L, our opex estimate is now NGN14.6bn (higher by 0.3%), with operating profit now lower by 44.0% to NGN2.8bn (previous estimate of NGN5.0bn). Of note, we have doubled our interest cost estimate due to an increase in gross debts by 276% to NGN17.7bn (mostly short term) and in view of rising interest rates. Further down the P&L, we reduced our tax forecast by 21.0% to NGN1.8bn (NGN2.3bn previously), implying a PAT of NGN3.6bn in '21f (vs. prior estimate of NGN5.0bn). These changes culminated in a 4.5% average reduction in our EPS estimates over the '21-23f period. Our new SoTP-derived price target is NGN11.8 (down by 6.9%); this target implies a potential upside of 6.8%. As such, we have downgraded our rating on UACN to Neutral (from Outperform).


Nonetheless, we highlight that over the coming months UACN will benefit from two transactions: (1) expected exposure to the UPDC REIT after unbundling is concluded and (2) the merger between Chemical and Allied Paints and Portland Paints (both subsidiaries of UACN) could bring cost efficiency. Year-to-date, UACN shares have gained 51.0% vs. the ASI's decline of -3.4%.


Cost pressure weakens margins

UACN's earnings disappointed in Q1 '21 on the back of higher-than-expected cost pressures. While turnover of NGN22.0bn was ahead of our forecast by 5.3%, PAT fell by 41.7% y/y and missed our estimate by 47.0%. According to management, cost escalations were attributable to higher raw material costs while production disruptions (Paints) impacted sales.

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