UACN: A Giant On Its Knees

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Monday, February 25, 2018     6:00PM / By Teslim Shitta-Bey

 

If a stock qualifies to be described as a blue chip, it was once UACN. The company’s 9-month results for 2018 shows a corporate giant that is now on bended knees. With net profit after tax slumping by -79.5% from N1.7bln  in the 9 months to September 2017 to N347.9mln in the 9 months to September 2018, investors are likely to see the stock record some drop in share price when the company releases its full year results by March 2019.

How a Giant has kept falling

 UACN (recent stock price N8.80) is a classic case of a football player ‘ball watching’. The flight of the ball becomes so attractive to a team’s defenders that they ignore the movement of their opponent’s attack and so when the ball lands it ends up sizzling into their net. The key reasons for UACN’s current weak financial position include the following:

  • The management has been slow to respond to changing consumer demographic. The company’s old businesses are no longer as relevant to the new digital age as it was to an analogue world where size alone was good enough to control market power
  • The company’s portfolio of businesses except real estate are in slow moving sectors that are gasping for margins as a result of both local and foreign competition and a fall in consumer demand. The company has exited from its pension business (UNICO CPFA) and its Water processing activities (WSWNL). The company’s real estate subsidiary has also opted to sell-off a hotel, UPDC Hotel Limited (UHL).
  • Adoption of technology and human capacity development has been chasing rather than leading the evolving Nigerian business ecosystem such that the company has moved from a phase of maturity to one of aging
  • Large debt exposure in both short and long term liabilities have depressed recent (and potentially future) earnings
  • Lower consumer spending has hit the company hard as sales volume tank on the back of slower GDP growth rate (1.9% for 2018) and double digit inflation (11.44%, December 2018) 

 

Chart1 UACN Net Income 2012-2016

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Chart2 UACN H1 2018 Revenue Division

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The financial books

UACN’s 9 month result for 2018 was certainly not a bundle of excitement but shareholders can take solace in the fact that at an operating level the company seems to be gradually rethinking its operations:

Profitability:

Gross revenues fell from N68.3bln in 9 months 2017 to N55.8bln in the contemporary period of 2018, representing a drop in sales of -18.3%. This was translated into a fall in operating profit from N5.7bln in September 2017 to N1.7bln in the same period of 2018, reflecting a slump in profit of -70.2%. This means that both dividend payouts and capital appreciation by year end 2018 will take a beating. The company’s stock seems to have already priced-in a poor year end outlook as the company’s share price at N8.80 (as at 3.00PM today Monday February 25, 2019) represents a -46% drop in equity value on a year-on-year (Y-o-Y) basis.


Chart3 UACN Gross Profit Margin 2011-2018

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Source: UACN H1 results 2011-2018

 

Asset Quality

UACN’s net working capital between the 9 months to September 2017 and 9 months to September 2018, rose by +202% from N10.5bln by September 2017 to N31.7bln by September 2018. The rise was largely due to the N17bln increase in cash and cash equivalents in 2018 and the N7bln fall in inventories over the period, both events suggesting greater corporate liquidity as trade receivables equally fell by about 2bln.


Liquidity

Growth in networking capital and falling inventories clearly saw the company experience a healthier operating period in the 9 months to September 2018 despite the fall in its revenue.  According to Olusegun Atere, chief trade strategist at Apel Assets and Trust, “liquidity is king in a market of slowing consumer spending and rising industry inventory, you need to stay nimble with cash so that you do not suffer operating paralysis, especially in an environment of high domestic interest rates’’, he insists.


Leverage

Even though UACN’s corporate liquidity looked a whole lot healthier in 2018 than 2017, the company still has trouble with its borrowings. Non-current borrowings rose from N1.3bln in 2017 to N4.8bln in 2018, a leap of 269%. In the short term borrowings actually fell from N20.8bln in 2017 to N16.3bln in 2018, suggesting the company is gradually rolling back its relatively high leverage. Another sore point appears to be the company’s steep deferred taxation in the region of N4.8bln or slightly over two and a half times its recent operating profit. The company needs to get its overdrafts in control and hack away at its other longer term liabilities. At a time interest rates are not likely to fall as the central bank (CBN) tries to tame inflation (presently at 11.37%); the financial environment may remain harsh. 


Perhaps it is all about the profit, but…

Investors are keen on seeing profits inch up, but apart from earnings climbing, investors need to dig into other operating numbers. Top line growth in earnings for the group has been fairly dull over the past five years on a compound annual basis, rising by a lazy -2% per annum. Net profit margin on gross revenue slipped from 10.6 per cent in 9 months 2017 to 2.5 per cent in September 2018.  Return on capital employed equally showed up poorly by dropping from 3 per cent in 9 month 2017 to `1.5 percent in 9 month 2017, a decline not many analysts consider inspiring.


…the job before Bello

Managing Director of the conglomerate, Abdul Bello has been thrown into the deep end of the business giants operating challenges and has a massive task ahead of him. Bello is a veteran of the company and has spent over twenty years at the organization but so had his predecessors and the problem appeared to be that insiders at the company lacked fresh eyes and insights into its sagging enterprises. Comfort with things as they are has left the conglomerate without hunger and determination to do things differently and rethink the whole business architecture.

 This may be its greatest undoing going into 2019. Bello, according to observers, needs to do a forensic review of each business line within the group and set fresh targets and highlight new opportunities. Part of the problem with UACN has been fear of risk or uncertainty by successive chief executives and this has inhibited the company from entering new markets or redefining old ones.

 

Illustration 1 UACN’s moving theatre of bosses

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With its huge and aging fixed assets, the group’s depreciation costs are programmed to rise and the company’s heavy pension liabilities may soak up massive potential cash flow. Admittedly the fear is mellowed by a mild rise in the performance of the local stock market (the NSE’s yield-to-date (YTD) is about +4.04% as against UACN’s YTD of -25%) which should enhance the value of the group’s investment assets but it is no substitute for a business model that optimizes earnings in a sustainable manner.

UACN was once a steel-muscled giant of the Nigerian corporate landscape but in the last two decades it has shrunk to a shadow of its former self. Whether or not the company reinvents itself will depend on how it’s chief executive officer and Board, interpret their roles and clarify their vision. A stumbling giant is a terrible sight even if it was, at one time, an intimidating Colossus. 

 

Likely investor action

Profit taking and portfolio rebalancing to be expected; outlook bearish. 

 

Illustration2 UACN’s SWOT Analysis

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UACN’s challenges have been one of weak corporate governance exemplified by an inability to respond to the changing needs of a conglomerate faced with new realities. Each passing generation of leadership and shifting business ecosystem has posed unique problems for Board and management. A report on the various corporate governance transition issues will be published at a later date to explain how once venerable companies suddenly become shadows of their old selves.

 

Visit UAC of Nigeria Plc IR Page on Proshare MARKETS

 

Graph 1: UAC of Nigeria Plc Graph As At 4th March, 2019

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Table 1: UAC of Nigeria Plc Q3 2018 Results

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9.       UACN appoints new successor as Ettah unveils retirement plan – The Guardian -Jul 27, 2017 


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