UAC Of Nigeria Plc. : Earnings dip as input and interest costs bite


Wednesday, August 2, 2017 9:10AM/Vetiva Research

Feeds business fuels growth, Group revenue up 32% y/y

High input costs remain a challenge, margins contract further

Elevated interest costs undercut weak EBIT, PAT down 55% y/y

H2’17 gives some hope, forecasts adjusted to reflect miss

Strong revenue growth powered by Feeds business, Real Estate

UAC of Nigeria recently released its H1’17 financial results showing a strong 32% y/y growth in topline to ₦48 billion. This performance was majorly driven by a mix of stronger prices and volume growth across the conglomerate’s operating divisions.

The Food & Beverages and Real Estate segments remained the strongest performing of its five segments, with revenue up 37% and 77% y/y respectively.

Specifically, the Feeds businesses (Grand Cereals and Livestock Feeds) provided the largest boost to Food segment revenue.

The Group’s quarterly revenue performance however came in worse than expected, with revenue 6% lower q/q and 11% below our estimate as topline dipped across all business segments.

Elevated interest cost pressures earnings

UACN’s margins continued to reel under significant cost pressures trailing the business from a turbulent 2016. Gross margin contracted 638bps y/y to 16% in H1’17. Contrary to our expectation and the sector wide margin recovery trend, UACN’s gross margin declined even further in Q2’17 to 15% (Q1’17: 17%).

According to Management, the Food businesses are still unwinding expensive inventory procured at the peak of cost pressures in Q4’16/Q1’17. Given this, Core operating profit declined 14% y/y and 38% below Vetiva estimate.

Elevated interest cost was the other major pressure point for UACN this period. Net interest expense rose from ₦366 million in H1’16 to ₦2.5 billion in H1’17 amidst much higher interest rates on loans (with rates on some bank loans as high as 24%).

Coupled with a 56% decline in contribution from UPDC’s Real Estate Investment Trust (REIT), H1’17 PAT came in 40% below our estimate and 55% lower y/y to ₦1.2 billion.

FY’17 forecasts adjusted to reflect higher interest charges

Despite the underperformance in Q2’17, we remain optimistic on strong performances across the business segments in the latter part of the year (Food and Paints categories especially), and as such retain our FY’17 revenue forecast of ₦96 billion (Guidance: ₦100 billion, FY’16: ₦85 billion).

With management stating that its expensive inventory stock pile will last till September, we expect gross margin improvement to be skewed towards the final quarter of the year.

As such, we revise H2’17 gross margin to 18% (Previous: 20%). Also, we maintain our ₦4.6 billion net interest expense estimate for FY’17 as interest cost burden persists.

Thus, we revise our FY’17 EPS estimate and Target Price to ₦1.40 (Previous: ₦1.74) and ₦25.65 (Previous: ₦28.68) respectively.

Looking to tackle the debt distress…

UACN remains determined to reduce this debt burden. The Group is in the process of raising ₦15.4 billion via a Rights Issue, which is currently awaiting regulatory approvals.

According to Management, a major portion of the proceeds raised will be channeled towards funding requirements for the highly working capital intensive Agro-allied businesses, thereby reducing its expanded bank facilities.

Also, for the highly leveraged Real Estate business (UPDC), Management has stated its intention to raise a 3-yr ₦20 billion corporate bond which is expected to come at a cheaper interest rate, compared to current bank borrowings.

Both the Rights and Bond issues are scheduled for September/October period in 2017.

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