UAC of Nigeria Q2 2016 Results Review: Outperfom Rating Maintained


Friday, August 05 2016 10:37AM /FBNQuest Research

10% cut to our 2016-17E EPS forecasts

UAC of Nigeria’s (UACN) Q2 2016 PAT of N708m came in -19% behind our estimate. We note that Q2 2015 numbers were restated to reflect the firm’s audited treatment of a N2bn impairment during that quarter. Similar to Q1, sales for UACN’s food & beverage segment performed better than expected and offset subdued numbers from its real estate and paints businesses.


Topline for the food & beverage segment was up 8% y/y, driven primarily by double-digit y/y growth in Livestock Feeds. The latter’s sales in Lagos (up +26% y/y) and in the north (up +66% y/y) were helped by improved operational efficiencies and the relative calm in the north-east respectively.


Unsurprisingly, the real estate market remained soft with UPDC’s property sales down by around -54% y/y to N800m.


Looking ahead, we expect a gross margin compression of around -140bps y/y in H2 on the back of the weakening naira and rising input, packaging & energy costs.


In other to support margins, management revealed plans to gradually raise prices across key consumer products. We also expect relatively lower y/y profits from associates given that a key commercial space managed by UPDC REIT remains unleased. Market fundamentals are likely to remain unchanged/worsen.


Therefore, we anticipate a subdued performance in H2. As such, we have cut our EPS estimates for the 2016-17E period by 10%. Our new price target of N30.3 is up 8% because we have rolled forward our valuation to 2017. Our PT implies a potential upside of 51%.


At current levels, UACN shares are trading on a 2016E P/E multiple of 13.0x for an average EPS growth of 8% over the 2016-18E period. Ytd, UACN shares have shed –3.6%, broadly in line with the market’s performance. We retain our Outperform rating.

Q2 2016 PBT up 11.7% y/y 

In Q2 2016, while sales of N19.3bn declined -3.5% y/y, PBT was up by 11.7% y/y to N2.2bn. PAT declined by -4.9% y/y to N708m due to a relatively higher tax rate of 39.7%. A net finance income of N198m more than offset a decline in profits from associates of around -34.3% y/y and led to the PBT growth during the quarter.


The net finance income suggests that realised benefits are already coming through from UACN’s property development company’s (UPDC) refinancing program. Compared with our estimates, while sales were 9% ahead of our N17.8bn forecast, PBT was in line, mainly due to opex coming in around 30% higher than our forecast and a negative surprise on the profit from associates line.

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