Wednesday, April 27, 2016 1:18PM/ FBNQuest Research
Event: UAC of Nigeria (UACN) reports Q1 2016 results
Implications: Downward revisions to consensus 2016 EPS forecast expected
Positives: No obvious positives
Negatives: PBT and PAT both down -23% y/y and -19% y/y resp.; net finance costs up 18% y/y
Late yesterday, the NSE published UAC of Nigeria’s (UACN) Q1 2016 results which showed that while sales were flattish y/y, PBT and PAT both declined by -23% y/y and -19% y/y respectively. A gross margin contraction of 121bp y/y to 22.4%, an 18% y/y rise in net finance charges and to a lesser extent a 4% y/y rise in opex led to the PBT decline during the quarter.
The y/y decline on the PBT line was primarily driven by the poor performance in UPDC, UACN’s real estate business, which posted a loss before tax of –N125m. CAP Plc, UACN’s core paints business, reported Q1 2016 numbers on Friday which showed a PAT decline of around -13% y/y to N422m (beat our forecast by around 10%). Even though CAP’s actual performance came in ahead of our forecast, the double-digit y/y decline is unsurprising given warnings by management a few weeks ago.
We had estimated a PAT decline of around -21% y/y to N383m. To put into context, CAP’s PAT growth has averaged around 40% y/y over the last five years. From a less gloomy perspective, topline was resilient, up 2% y/y to N1.9bn.
However, gross margin contracted by around -500bp y/y to 49%. Fx related issues and increased cost of production were drivers for the gross margin contraction. We suspect that CAP’s struggle to source its required fx for imports continues. UACN management stated that an on-going arrangement with its technical partner provides credit allowances for imported input materials. We assume this can only last for so long. In our view, a prolonged fx scarcity could threaten this arrangement.
Sequentially, UACN’s sales, PBT and PAT all declined by -6% q/q, -65% q/q and 67% q/q respectively. A gross margin contraction of -217bp q/q and a 120% q/q rise in net finance charges offset a positive surprise in profits from associates. Compared to our estimates, while sales were 9% ahead of our N16.1bn forecast, PBT came in 18% behind largely because of negative surprises on the both opex and finance cost lines. However, PAT was in line due to UACN’s tax rate of 25.3% vs. our 35% estimate.
In terms of the segmental drivers behind the flattish y/y topline decline, sales for UACN-(ex-Paints and real estate), our proxy for UACN’s food business, were up by 4% y/y to N15.0bn in Q1, positively surprising by around 16%. UACN’s real estate subsidiary also saw sales decline by -53% y/y to N684m while sales for CAP were up by just 2% y/y.
On an annualised basis, Q1 sales and PBT are both tracking behind consensus estimates of N76.2bn and N10.0bn respectively. Given this, we expect downward adjustments to consensus 2016 estimates. We also expect the market to react negatively to these numbers in the short term.
At current levels, on our published estimates, UACN shares are trading on a 2016E P/E multiple of 11.2x for 14% EPS growth in 2017E. Year to date, UACN shares have declined -8.4% outperforming the NSE ASI which has shed -13.3%.
We rate the shares Outperform. Our estimates are under review.
UAC of Nigeria Q1 2016 results vs. FBNQuest estimates (N millions)