UAC-PROP 2020 Rights Issue: A Hard Way to A New Future

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Friday, February 28, 2020 / 3:13 PM / By Proshare Research / Header Image Credit: Twitter; @nsenigeria

 

UPDC, the erstwhile property and real estate subsidiary of UAC Plc is attempting what only a few companies have achieved; a sharp turnaround in business fortune from a bad season of losses. The company has been one of the major corporate casualties of Nigeria's recent recession between 2016 and 2017.

 

Old Numbers, New Expectations

UPDC recently embarked on a rights issue of 15,961,574,145 ordinary shares of 50 kobo each at N1.00 per share. The rationale for the rights issue is to address the company's most pressing challenges and reverse leverage problems.

 

The company's financials reflect a downward trend in turnover, profit before tax, retained earnings, earnings per share, profit/loss margin, gross profit margin, total assets and net assets. Additionally, there was a surge in its debt to equity ratio which reflected tighter liquidity. According to the company, the increase in its losses incurred over the years was the result of a heavy debt burden and impairment losses.

 

The Nigerian economy slipped into recession in 2016 and early 2017 while the real estate sector and the construction sector contracted in 2016 which resulted in a decline in real estate asset and rental rates. The recession in the Nigerian economy resulted in the decline in consumer spending, high borrowing cost and high vacancy rate. This negatively affected the financials of UPDC, as it has since reported a downturn in its profits, retained earnings, earnings per share, total assets and net assets.

 

Despite the myriad of challenges faced by the company, there are still prospects for recovery, growth and development of the company. The rights issue recently embarked by the company will help reduce its outstanding debt obligations. Also, the company has new leadership and stronger corporate governance which will hopefully lead to a turnaround of the company.

 

Chart 1: UPDC Turnover 2014-2019 (Nb'n)

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Source: NSE, Proshare Research

 

UPDC's turnover has trended downwards. It reported its highest turnover of N11.70bn in 2014 and has since recorded a decline in its yearly turnover.  In 2019, UPDC reported its lowest turnover of N2.13bn, a decline of -7.39% from the previous year. Its turnover has declined by -81.79% from N11.70bn in 2014 to N2.13bn in 2019 (see Chart 1 above).

 

Chart 2: UPDC Profit/Loss before taxation 2014-2019 (N'bn)

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Source: NSE, Proshare Research

 

UPDC's profit/loss before taxation regressed unexpectedly over the last half decade. It reported profits of N3.54bn and N56mn in its financial statements in the year 2014 and 2015 respectively. It has since reported losses before tax of N1.78bn, N3.06bn, N9.22bn and N16.52bn in the years 2016, 2017, 2018 and 2019 respectively. Its highest loss of N16.52bn was reported in 2019 representing an increase in its loss of +79.18% from the previous year. There has been a decline in its profit by -566.67% from a profit of N3.54bn in 2014 to a loss of N16.52bn in 2019 (see Chart 2 above). It reported an increase in loses due to high interest burden and non-cash impairment losses/charges (due to reduced valuation of property asset and in the case of 2019 a change in accounting treatment of the REIT due to the decision to unbundle leading to an impairment charge of N12.6bn when the investment in the REIT was marked to the market price of the REIT's units.)

 

Chart 3: UPDC Retained Earnings 2014-2019 (N'bn)

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Source: NSE, Proshare Research

 

UPDC's retained earnings slid between 2016 and 2019. It reported its highest retained earnings of N31.33bn in 2014 and has since recorded a decline in its reported earnings. It reported negative retained earnings of N5.41bn in 2019 a decline of -149.82% from the previous year. There has been a decline in retained earnings by -117.27% from retained earnings of N31.33bn in 2014 to negative retained earnings of N5.41bn (see Chart 3 above).

 

Chart 4: UPDC Net Assets 2014-2019 (N'bn)

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Source: NSE, Proshare Research

 

UPDC's net assets has a downward trend. It reported its highest net assets of N36.05bn in 2014 and has since recorded a decline in its net assets. Its lowest net assets of N1.78bn was recorded in 2019. Its net assets declined by -90.14% to N1.78bn in 2019 from N18.06bn in 2018. Its net assets declined by -95.06% from N36.05bn in 2014 to N1.78bn in 2019 (see Chart 4 above).

 

Chart 5: UPDC Total Assets 2014-2019 (N'bn)

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Source: NSE, Proshare Research

 

UPDC's total assets has a downward trend. It reported its highest total assets of N71.96bn in 2015 while it recorded its lowest total assets of N28.64bn in 2019. In 2019, there was a decline in its total assets by -38.37% to N28.64bn from N46.67bn in the previous year. Its total assets declined by -57.94% to N28.64bn in 2019 from N68.09bn in 2014 (see chart 5 above).

 

Chart 6: UPDC EPS (kobo) 2014-2019 (N'bn)

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Source: NSE, Proshare Research

 

UPDC earnings per share has tumbled steadily in the last four years. It reported its highest earnings per share of 210kobo per share in 2014 and has since recorded a decline in its earnings per share. Its lowest earnings per share of a loss of 626 kobo per share was recorded in 2019. There was an increase in its loss in earnings per share of +8.68% from a loss of 576 kobo per share in 2018 to a loss of 676 kobo per share (see Chart 6 above).

 

Chart 7: UPDC Profit/Loss after tax Vs Real Estate Growth

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Source: NSE, Proshare Research

 

The real estate sector grew at a rate of +5.12% and +2.11% in 2014 and 2015 respectively before contracting in 2016 till date. UPDC profitability moved in the same trend as it reported profits of N3.54bn and N54mn in 2014 and 2015 respectively before the downward trajectory of losses incurred from 2016 till date (see Chart 7 above).

 

Although the real estate sector has been in recession since 2016, the rate of growth in the sector has been inconsistent as there were reductions in the real estate contractions to -4.27% and -2.36% in years 2017 and 2019 respectively from their previous years. On the other hand, UPDC has consistently recorded an increase in its loss incurred as it reported an increase in its loss by +828.09% from a loss of N1.78bn in 2016 to N16.52 in 2019. According to the company, the recession in the Nigerian economy which led to the contraction of the real estate sector resulted in decline in real estate asset values and rental rates (see Chart 7 above).

 

Chart 8: UPDC Profit/Loss after tax Vs Construction Growth Rate

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Source: NSE, Proshare Research

 

The construction sector recorded positive growth rates of +13.03% and +4.35% in 2014 and 2015 respectively before recording a contraction of -5.95% in 2016 and has since recorded positive growth rates with its latest growth of +1.81% in 2019. On the other hand, UPDC reported a loss of N1.78bn in 2016 from a profit of N56mn in 2015 and has ever since continually incurred an increase in its loss despite the positive growth rates in the construction sector, due to high debt, which further led to increased interest payments and non-cash impairment charges on assets.

 

Chart 9: UPDC Profit Margin 2014-2019(%)

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Source: NSE, Proshare Research

 

UPDC had positive profit margins of +30.26% and +1.10% in 2014 and 2015 respectively. UPDC profit margin recorded a negative turnaround when the Nigerian economy slipped into recession in 2016 and early 2017. It reported a record-high negative profit margin of -775.59% in 2019.

 

Chart 10: UPDC Gross Profit Margin 2014-2019(%)

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Source: NSE, Proshare Research

 

UPDC recorded positive gross profit margins from 2014-2017, over the period it posted the highest gross profit margin of +29.75% in 2015. In 2018 and 2019 UPDC recorded negative gross profit margins of -37.39% and -38.5% respectively (see Chart 10 above).

 

Chart 11: UPDC Liquidity ratio 2014-2019(%)

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Source: NSE, Proshare Research

 

UPDC has a downward trending liquidity ratio. Its highest liquidity ratio of +81.33% was recorded in 2014 while its lowest liquidity ratio of +53.17% was recorded in Q3 2019. The decline in liquidity ratio could be attributed to the decline in current assets relative to current liabilities (see chart 11).

 

Chart 12: UPDC Debt to Equity ratio 2014-2019(%)

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Source: NSE, Proshare Research

 

UPDC has an upward trending debt to equity ratio. UPDC debt to equity ratio fluctuated between +57.34% and +65.12% between 2014 and 2016. It recorded a sudden surge to +102.83% in 2018 from +57.34% in 2017. Its debt to equity ratio had climbed to +125.51% as at 30th September, 2019. A major concern of UPDC is its increasing heavy debt burden which will be significantly reduced by 75% from N20.5bn to N4.5bn after the completion of the ongoing rights issue.

 

Chart 13: UPDC Six-Year Annual High and Low Market Prices 2014-2019(%)

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Source: NSE, Proshare Research

 

UPDC highest and lowest stock prices in 2014 were N26 per share and N9.43 per share respectively. Compared to 2019 this has dropped significantly as UPDC highest and lowest stock prices are N1.95 per share and 0.82kobo per share respectively (see Chart 13).

 

What went wrong?

According to the company the downturn in performance was "because of a heavy debt burden, but more recently, due to impairment losses". The company noted following:

  • latter phase of the company's expansionary drive coincided with Nigerian recession in 2016 and early 2017, resulting in decline in real estate asset values and rental rates.
  • As market conditions deteriorated. UPDC struggled to manage its cash flow, relying on issuance and reissuance of short-term instrument (i.e. Commercial Papers). UPDC's outstanding CP's increased from N10.4bn in 2014 to N14.3bn in 2018.
  • FY 19 performance was impacted largely by the write down of the REIT. Carrying value reduced from N20.0bn share of NAV to N7.0bn market value".


Rationale for a rights issue

A major rationale for a rights issue was to restructure the debt portfolio in order to support business sustainability. The rights offer would do the following:

  • Strengthen and improve UPDC's capital structure
  • Reduce financing cost and the company's debt burden
  • Improve free cash flow (FCF) which would translate into better performance and improved shareholder value
  • Provide UPDC with operational and financial flexibility to embark on the next phase of its growth plan.


Light at the end of a dark tunnel

Despite the challenges faced by UPDC, the company appears to have growth potentials going forward. The rights issue will help reverse the poor leverage position of the company fulfil their debt obligations and put them on the right track. Also, the


 company has a new leadership and stronger corporate governance in a bid to restructure the company and put in the right track for profitability.

 

Graph: One Year Share Price Movement

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Related News

1.        UPDC To Use N15.961bn Rights Issue To Improve Cash Flow, Create Value For Shareholders

2.       UPDCREIT declares N1.9bn PAT in Q4 2019 Unaudited Results,(SP:N3.40k)

3.       UPDCREIT declares N1.5bn PAT in Q3 2019 Results,(SP:N4.90k)

4.       UPDC Plc Announces Closed Period For Q3 2019 Unaudited Results

5.       UPDC Plc Announces the Appointment of Mrs Folakemi Fadahunsi as its CFO and a Director of the Company

6.       UPDC Plc Notifies of Delay in filing its 2018 Audited Financial Statement

7.       UPDC Plc Announces Board Meeting and Closed Period

8.      UPDCREIT Declares N2.21bn PAT in Q2 2018 Results,(SP:N9.00k)

9.       UPDCREIT declares N1.32 billion PAT in Q3'17 Results,(SP:N10.00k)

10.   UPDC Plc Announces Closed Period for 2017 Half Year Results

11.    UPDC Appoints Mrs. Folake Temitope Kalaro as Company Secretary


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