Tuesday, May 28, 2019 / 11:15AM / By
16% increase to 2019-21E average EPS forecasts
UAC of Nigeria’s (UACN) Q1 outperformance was driven by a stronger-than-anticipated recovery in its animal nutrition and edibles businesses (Grand Cereal and Livestock Feeds; c.55% of group sales) combined with a positive surprise in net interest expense (-98%). PBT gained 52% y/y and beat our forecast by 147%. Explaining the Q1 performance, management claimed that it is regaining market share previously lost to competition in the animal feeds market.
That said, it is also clear that growth from this segment came from a low base following a weak y/y Q1 growth recorded in 2018. Looking ahead, we still see a challenging market for UACN’s animal nutrition business. Indeed, large players such as Flour Mills of Nigeria and Olam International plan to consolidate their positions in this market, suggesting that competition will remain fierce over the foreseeable future. With this in mind, our upward adjustments in earnings over forecast years are well below the 147% positive PBT surprise in Q1 2019.
We have raised our 2019-21E EPS estimates by 16% on average. Nevertheless, on the back of higher sum-of-the-parts valuation assumptions, our new price target of N11.8 is around 32% higher than previous. Year-to-date, UACN’s shares are down -35%, underperforming the broad index by -31%.
Our new price target implies a potential upside of 86% from current levels. Although bearish sentiments continue to weigh on consumer stocks following their poor year-to-date earnings, we believe y/y improvements in UACN’s quarterly earnings is a potential catalyst for a rally over the rest of the year. We therefore upgrade our rating on the shares to Outperform.
PBT up 52% y/y in Q1
Q1 sales for the group increased 13% y/y to N20.6bn, while net interest expense fell by -98% y/y, driving a 52% y/y increase in PBT to N1.5bn. Other income was down -64% y/y but this was not strong enough to offset the positives from sales and interest income. Sequentially however, sales declined by -10%, driving a significant q/q decline in PBT. Compared with our forecasts, sales and net interest expense beat by 10% and -98% respectively. PBT was therefore 147% ahead of our forecast of N600m.