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UAC of Nigeria Plc Q1 2017 - Earnings Miss on Elevated Interest Charge

Stock & Analyst Updates	1860 VIEWS
Stock & Analyst Updates
1860 VIEWS

Wednesday, May 03, 2017 1:05 PM / Vetiva Research

· Strong start to FY’17, topline up 41% y/y

· Earnings undercut by huge jump in financing costs

· Q1’17 PAT slumps, down 54% y/y

· FY’17 forecasts adjusted to reflect higher interest charges

Strong revenue growth persists in Q1’17
UACN recorded an impressive 41% y/y revenue growth in the first quarter of 2017, outperforming Vetiva estimate by 17%.

This growth was majorly driven by price increases implemented in the latter part of 2016 and better volume performances across some operating divisions.

Specifically, the strongest boost to topline came from the Food & Beverages and Real Estate segments, recording y/y growth of 46% and 189% respectively.

Performance from the Paints segment however remained tepid as revenue came in flat y/y and 3% lower q/q, amidst sustained pressure from the premium paints subsidiary CAP.

Elevated interest cost pressures earnings
Cost pressures remained a challenge for the Conglomerate in Q1’17 as price increases were unable to save Q1’17 gross margin from a 598bps y/y contraction to 17% (Vetiva estimate: 21%).

With this, gross profit came in at ₦4.1 billion, a mild 4% y/y growth. Earnings took a further beating from a significant 125% y/y rise in interest charge to ₦1.8 billion.

With borrowings 9% higher y/y, this jump in financing expenses was majorly due to an increase in interest charges amidst an elevated interest rate environment.

From UPDC’s Q1’17 financial statement (accounts for 69% of UACN’s total borrowings), the average interest rate for facilities from local banks during the period rose to 21.2% (FY’16: 15.5%).

Coupled with a lower contribution from UPDC’s Real Estate Investment Trust, Q1’17 PAT came in 58% below our estimate, down 54% y/y to ₦606 million.

FY’17 forecasts adjusted to reflect higher interest charges
In a bid to reduce its debt burden, UPDC is in the process of raising equity capital via a ₦5.16 billion Rights Issue.

Given that the company is still awaiting regulatory approval, we are yet to factor the Rights into our model.

That said, we revise our FY’17 net interest expense estimate to ₦4.6 billion (Previous: ₦1.8 billion; Q1’17: ₦1.2 billion).

However, given that we remain optimistic on slightly better input costs this year and following an upward revision to our revenue growth estimate (from 10.0% to 11.4%), our FY’17 EPS estimate comes to ₦1.74 (Previous: ₦2.17).

Our Target Price is also revised downwards to ₦28.54 (Previous: ₦30.91).

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