April 17, 2018 /04:48 PM/ Vetiva Research
• Revenue up 8% y/y, supported by Food and Paints segments
• High production, operation and finance costs derail margins
• FY’17 PAT clocks in 59% weaker than Vetiva estimate
• Board announces FY’17 dividend/share of ₦0.65 (FY’16: ₦1.00)
FY’17 PAT moderates 79% y/y as cost pressures bite
Despite an 8% y/y rise in Revenue, UAC of Nigeria (UACN) recorded a 79% y/y decline in PAT (₦1.3 billion) - weakest bottom line performance in 16 years. The dismal performance was driven by sharp rises in expense lines which outpaced weak topline growth. Notably, FY’17 gross profit moderated 6% y/y following a 261bps deterioration in gross margin – specifically dragged by cost pressure from expensive raw materials procured in Q4’16/Q1’17.
Also, largely driven by an acceleration in selling & distribution expenses, Operating Expenses rose 19% y/y to ₦11.5 billion (Vetiva estimate: ₦11.0 billion). With this, Operating Profit declined 19% y/y to ₦7.0 billion (Vetiva: ₦7.3 billion) despite a ₦2.6 billion boost from Other income (FY’16: ₦1.4 billion). Earnings were further undercut by a jump in net interest expense, up 218% y/y to ₦4.3 billion (Vetiva: ₦3.8 billion), as interest rate on bank loans rose 521bps y/y to 19%.
Furthermore, following a higher than expected effective tax rate in the final quarter, bottom line turned negative in Q4’17 with overall FY’17 profit after tax coming in 59% lower than we had expected at ₦1.3 billion.
Watch out for outcome of defining strategic review in FY’18
The tough operating environment and changing industry dynamics in Nigeria has weakened earnings over the past few years - exposing vulnerabilities in UACN’s business model. In light of this, and given the new face of the Conglomerate’s Management team, a holistic business review is underway to reposition the business on the path of organic growth and profitability.
We believe this is essential given the seemingly bleak near-term outlook for most of the business segments and overall lack of synergies on the Group level. We expect a number of big announcements at the conclusion of the review, scheduled for H1’18.
This may include mergers, divestments and sale of assets/properties. That said, we cautiously forecast a 4% y/y revenue decline to ₦86 billion, while PAT is expected to recover from the FY’17 low base to ₦4.0 billion – supported by better cost containment expectations. We revise our 12-Month post rights issue Target Price to ₦20.87.
However, given the expected changes in the business structure upon completion of the strategic review, we place UACN on a HOLD until further notice.
Ifedayo Olowoporoku of Vetiva Capital Management Limited can be reached vide firstname.lastname@example.org
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