UACN Plc FY'17 - Dismal FY’17 Earnings, Strategic Review on Course


Tuesday, April 17, 2018 /04:48 PM/ Vetiva Research

• Revenue up 8% y/y, supported by Food and Paints segments

• High production, operation and finance costs derail margins

• FY’17 PAT clocks in 59% weaker than Vetiva estimate

• Board announces FY’17 dividend/share of 0.65 (FY’16: 1.00)

FY’17 PAT moderates 79% y/y as cost pressures bite
Despite an 8% y/y rise in Revenue, UAC of Nigeria (UACN) recorded a 79% y/y decline in PAT (1.3 billion) - weakest bottom line performance in 16 years. The dismal performance was driven by sharp rises in expense lines which outpaced weak topline growth. Notably, FY’17 gross profit moderated 6% y/y following a 261bps deterioration in gross margin – specifically dragged by cost pressure from expensive raw materials procured in Q4’16/Q1’17.

Also, largely driven by an acceleration in selling & distribution expenses, Operating Expenses rose 19% y/y to
11.5 billion (Vetiva estimate: 11.0 billion). With this, Operating Profit declined 19% y/y to 7.0 billion (Vetiva: 7.3 billion) despite a 2.6 billion boost from Other income (FY’16: 1.4 billion). Earnings were further undercut by a jump in net interest expense, up 218% y/y to 4.3 billion (Vetiva: 3.8 billion), as interest rate on bank loans rose 521bps y/y to 19%. 

Furthermore, following a higher than expected effective tax rate in the final quarter, bottom line turned negative in Q4’17 with overall FY’17 profit after tax coming in 59% lower than we had expected at
1.3 billion.

Watch out for outcome of defining strategic review in FY’18
The tough operating environment and changing industry dynamics in Nigeria has weakened earnings over the past few years - exposing vulnerabilities in UACN’s business model. In light of this, and given the new face of the Conglomerate’s Management team, a holistic business review is underway to reposition the business on the path of organic growth and profitability. 

We believe this is essential given the seemingly bleak near-term outlook for most of the business segments and overall lack of synergies on the Group level. We expect a number of big announcements at the conclusion of the review, scheduled for H1’18.

This may include mergers, divestments and sale of assets/properties. That said, we cautiously forecast a 4% y/y revenue decline to
86 billion, while PAT is expected to recover from the FY’17 low base to 4.0 billion – supported by better cost containment expectations. We revise our 12-Month post rights issue Target Price to 20.87. 

However, given the expected changes in the business structure upon completion of the strategic review, we place UACN on a HOLD until further notice

Ifedayo Olowoporoku  of Vetiva Capital Management Limited can be reached vide

Plot 266B Kofo Abayomi Street | Victoria Island | Lagos | Nigeria| +234-1-4617521-3

Proshare Nigeria Pvt. Ltd.

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