Wednesday, April 06, 2016 8:55AM /ARM Research
· UAC of Nigeria Plc. (UACN) released audited FY 2015 results wherein revenue fell 14.6% YoY to N73.1 billion while PBT and PAT declined 43.6% and 52.0% YoY to N7.9 billion and N5.1 billion respectively.
· In addition, UACN proposed a FY 15 dividend per share of N1.00 (FY 14: N1.75) which translates to a dividend yield of 4.8% using last trading price.
Slowdown at real estate business induces topline Weakness
· Extending recent run of negative growth, Q4 15 revenue contracted 26.1% YoY to N18.5 billion (FQ4 15E: N21.4 billion). Disaggregating the sub-components, weakness at ex-listed subsidiaries (which comprise Grand Cereals Limited, UAC Foods, UAC Restaurants and MDS Logistics), real estate subsidiary (UACN Property Development Company – UPDC), and Portland Paints more than offset top-line growth at Livestock feeds (+5.6% YoY to N2.6 billion) and Chemical and Allied Paints (+1.3% YoY to N2.0 billion). Recent discussions with management reveals that revenue downswing at its food business continues to reflect impact of subdued consumer spending as well as outbreak of avian flu. At UPDC, top-line contraction largely stemmed from its luxury real estate segment while softening growth picture at O&G and construction sectors weighed on Portland.
· Over FY 15, struggles at UPDC (-56% YoY to N5.1 billion), ex-listed subsidiaries (-11.4% YoY to N49.8 billion) and Portland (-22.5% YoY to N2.2 billion) offset revenue growth at Livestock feeds (+13.3% YoY to N9.0 billion) and Chemical and Allied Paints (+1.0% YoY to N7.1 billion) in driving weaker headline growth.
Broadly weaker commodity prices buoy gross margins
· Despite higher flour prices (12% YoY), largely benign trends across refined sugar (-10% YoY) and sorghum (-5.7% YoY) helped drive a quicker decline in Q4 15COGS, relative to revenue, (-28.6% YoY to N14.0 billion), resulting in grossmargin expanding 258bps YoY to 24.6% (Gross profit: -17.5% YoY to N4.6billion). Given UACN’s sizable use of domestic inputs across business lines (70-80%), limited scope for FX pressures muted input cost trends over FY 15 (COGS: -14.9% YoY to N56.6 billion). Consequently, Gross margin expanded 30bps YoYto 22.6% (Gross profit: -13.6% YoY to N16.6 billion).
· Though Q4 15 OPEX contracted 8.7% YoY to N2.0 billion (OPEX-Sales ratio:+204bps YoY to 10.6%), its slower decline relative to revenue exacerbated top-line weakness driving operating profit 23.1% YoY lower to N2.6 billion (EBIT margin:+54bps YoY to 13.9%).
· Over FY 15, an 8.5% YoY downswing in S&D expenses muted impact of higher admin costs (+5.1% YoY to N6.9 billion) leaving OPEX largely flat (+0.2% YoY to N10.2 billion). Thus, reflecting sales weakness at non-listed and real-estate subsidiaries, FY 15 EBIT declined 29.3% YoY to N6.4 billion with corresponding margin contracting 180bps YoY to 8.7%.
Headwinds to real estate sector swings earnings lower
· Notwithstanding slightly lower borrowings (-9.4% YoY to N25.7 billion) over the period, Q4 15 net finance expense more than double YoY to N256 million largely reflecting higher net borrowing costs at the real estate subsidiary.
· Furthermore, second order impact of slowing real estate sector growth drove a steep drop in share of profit from UPDC REIT (-76.4% YoY to N356 million). Assisted by 6.7% YoY contraction in net other income to N2.4 billion, PBT and PAT fell 30.6% and 31.0% YoY to N5.1 billion and N4.2 billion with corresponding margins 170bps and 160bps lower YoY at 27.4% and 22.6%.
· Going forward, the general economic slowdown and subdued consumer income— amid rising inflation— should drive continued weakness across UACN’s business lines. Furthermore, the continued avian flu pandemic and adverse impact on poultry farming points to extended weakness at UACN’s animal feeds businesses. On input costs, recent disclosure by flour millers and sugar refiners to pass-through devaluation costs and higher import costs should weigh on margins. With regards to share of profit from UPDC REIT, our prognosis for sustained weakness of real estate industry should drive slimmer profits. In summary, the economic landscape speaks to softer earnings for UACN over 2016.
· Currently, UACN trades at a premium P/E to its Bloomberg Middle East & Africa peers both on a current (UACN: 13.1x, Peers: 12.4x) and forward (UACN: 14.2x, Peers: 10.9x) basis. Last trading price of N20.45 is at discount to our last published FVE of N31.30. Our estimates are under review.