ARM recommends NEUTRAL on the shares of UAC Property Development Plc


May 10, 2013 13:15hrs | ARM Research

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Improving market conditions revive sales
UAC Property development Plc (UPDC) reported a 78% YoY rise in FY 12 turnover at N12billion. At N4.3billion, seasonally the strongest, Q4 12 turnover was 80% higher QoQ tracking ahead of our N4billion forecast.  The company had made significant restatements to its FY 11 numbers rendering comparison difficult.

•We attribute strong revenue growth in the period to improvement in property sales during the period; inventories declined 24% YoY for FY 12. Also, company sources cited improved occupancy rates at UPDC run hotels, which typically contributes ~ 10% to total revenues.

Input costs shave off revenue gains, crimping margins
•COGS soared 107% YoY in FY 12 to N7billion. UPDC had already noted during the year that high cost of imported interior finishing put pressure on COGS.  Gross margins came in 8pps lower at 42% for FY 12, compared to the previous year.

•Administrative expenses rose 29% YoY to N1.7 billion for FY 12. As a percentage of turnovers, admin expenses dropped 6pps YoY to 14%; admin expenses was one of the few line items that without major restatements in 2011. 

•FY 12 operating profit was 60% higher YoY at N3.2billion on margins of 27%, which was 3pps lower YoY. On the other hand, FY 12 finance costs were 57% higher YoY at N1.5billion, with current financial liabilities at N15.8billion, 82% higher YoY.

With a 68% YoY decline in “Other Income” to N503million in FY 12, the cumulative effect of compression at the gross and operating level meant that PBT margins were 15pps lower YoY at 20% on a PBT of N2.4billion. Effective tax rate of 11% was much lower than 30% in the previous year and our 16% forecast which was based on trends till 9M 12 – this led to a 62% YoY decline in taxes to N274million. Overall, FY 12 EPS of N1.61 was 30% higher YoY but net margins were down 7pps YoY to 18% which compares with a 4-yr historical average of 24%.

Further deterioration  in Operational Performance for Q1 13
•Q1 13 revenues rose 24% YoY to N3.2billion, slightly ahead of our N3.0billion forecast which we believe was driven, in part, by increased rental income from the commissioning of its Grandville Estate in Ikeja GRA that quarter and, possibly, increased occupancy rates at UPDC hotels as new strategic partnerships to bring clients with Air France and South African airways which kicked off during the period.

•However, cost of sales rose a further ~43% YoY to N2.3billion, 27% higher than our forecasts. We had expected a strategic shift from the high-end residential developments in favour of the mid tier segment that management had harped upon in 2012 to translate to reduced cost of finishing items but it would appear that anticipated costs benefits were not forthcoming, a phenomenon that would require clarification in view of generally stable cost of materials.  Gross margins shrank 9pps YoY to 29% in Q1 13.

•Similarly, administrative expenses rose 45% YoY to N588million in Q1 13exceeding our N474million forecast while rising  2pps YoY to 18% of sales.– With core operating income of falling 43% to N330million in Q1 13, operating margin dropped 12pps YoY to 10%.

•Finance costs soared 109% YoY to N340million, with current financial liabilities rising ~20% to N19billion. It’s a negative cash balance of (N1.4 billion), a deterioration in interest coverage ratio to 97% and negative working capital, also suggested deteriorating liquidity conditions for the company. 

•It  however booked N450million in extraordinary income from sale of other investment property in Q1 13 which boosted PBT and EPS of N436million (Q1 13E: N441million) and N0.23 (Q1 13E: N0.22) respectively, bringing these items in line with our forecasts;  on effective tax rates of 27% sending both 49% and 60% higher YoY respectively. Unadjusted PBT and net margins clocked 14% and 10% respectively.

Higher input costs and financial leverage temper cautious optimism
•Despite decidedly tepid performance in the past few quarters, improving conditions in the real estate market bolster outlook for sales, especially as we believe UPDC’s recently launched REIT provided an exit from problematic inventory in high-end developments. UPDC  is due to sell 4 of its major rental income generating properties to the UPDC REIT in Q2 13 which could see a reduction in rental income for the year, however we expect the proceeds from sale of the properties to boost contribution of sale of property stock to turnover for FY 13.

•Longer term, we expect ongoing reforms in the mortgage financing sector underpin market industry fundamentals as we expect more affordable financing for housing to significantly drive demand for residential real estate--UPDC’s primary segment--in an economy where housing gap is estimated at 18 million units even as it switches focus to the mid tier housing segment. More immediately, the launch of its Grandville estate in February as well as phase one of Cameron Green, which the company reports has attracted lots of occupants should boost FY 13 revenue. Management also estimates that occupancy rates at its Golden Tulip hotel will rise significantly in FY 13 from ~ 28% in 2012, underpinned by  ongoing development of the linking Lagos Badagry expressway as well as the signing of long term contracts with two additional airlines (raising total to 4) in Q1 13. At N4.8billion, our Q2 13E turnover is 70% higher YoY (FY 13E: N14.9billion). Our models factor a relatively conservative 8% CAGR revenue growth through 2017 , tempered by lower realizable revenues in the low – mid tier segment, which we believe will constitute much of its development portfolio post the launch of its REIT.

•Though we foresee that some of reduction in prices of building materials--which did not reflect in FY 12 as anticipated--will filter through in FY 13 as initiatives to seek cost efficient alternatives to its imported finishing products gathers steam, we keep COGS at current levels till such cost savings materialise.  Our Q2 13E COGS of at N3.1billion (FY 13E: N9.7billion), translates to a gross margin of 35% sets margins behind historical 5-yr average of 45%.

•Q2 13E administrative expenses come in at 18% of turnover at N737 million while   Q2 13E finance costs stands at an annualized N365million. These translate to Q2 13E PBT of N583million (FY 13E: N2.9billion). With an effective tax rate of 27% based on Q1 13 levels, our Q 13 EPS comes in at N0.31(flat YoY) on a PAT of N425million (FY 13E: N2.1billion) with a corresponding net margin of  10%.

Limited value upside based on our estimates
•These forecasts lead to a fair value estimate of N15.17, just 6% ahead of the last closing price of   N14.3. The company proposed a dividend of N0.70 which falls short of the N0.85 we anticipated and translates to a dividend payout ratio of 44%. UPDC trades at current and forward P/E of 8.5x and 9.1x respectively, a P/Bv of 0.62x.We are currently NEUTRAL on the stock.

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