UACN Records Modest Performance in Q2'14 Result; BUY recommendation Maintained

Proshare

Thursday, August 14, 2014 02:21 PM / Chapel Hill Denham Research

UAC of Nigeria Plc (UACN) held an analyst meeting last week to discuss its H1-14 results. We revise our FY-14E and FY-15E earnings forecasts and maintain our BUY recommendation on UACN with a new 12-month target price (TP) of N74.14 (previously N73.65).

Food and livestock feed to fuel FY-14E EPS growth

UAC Foods, Grand Cereals, and CAP lifted UACN’s performance in Q2-14. The three segments were the drivers of UACN’s sales growth of 9.4% yoy in Q2-14. UAC Foods grew sales by 12.1% yoy, driven by growth in the sales volumes of cake and the launch of two new variants of Gala Kingsway Beef and Gala Chicken. We expect the market penetration of the new products to influence volume in Q3-14 and Q4-14. As a result, we raised our volume growth expectation for Gala to 9.3% yoy from 7.4% yoy previously. Grand Cereals Limited (GCL) recovered in Q2-14 after the mute performance in Q1-14 as sales accelerated by 5.6% yoy on volume growth and price increase. We revised our FY-14E volume growth forecast for GCL to 3.7% yoy from 2.9% yoy on the back of this recovery. Chemical and Allied Products Plc (CAP) grew sales by 12.8% yoy in Q2-14, reflecting a slower pace compared to 19.7% yoy in Q1-14. As a result, we cut our sales growth forecast to 20.4% yoy from 31.3% yoy previously. MDS Logistics Plc (MDS) also returned to growth in Q2-14 as sales rose 8.4% yoy compared to a flat growth in Q1-14. This was despite the security threat in North Eastern Nigeria, which negatively impacted the throughput of its customers during the period.

UPDC and UAC Restaurants underperformed in Q2-14. UACN Property Development Company Plc (UPDC) recorded a decline in sales for the second quarter in a row. Sales dropped further by 8.0% yoy in Q2-14 after the drop of 3.7% yoy in Q1-14. According to management, the business was affected largely by delays in the take-off of some of the company’s building projects. Prospective property buyers were also cautious of certain regions in Nigeria on security concerns. Given these developments, we lowered our FY-14E sales growth forecast for UPDC to 5.5% yoy from 12.0% yoy previously. Based on management guidance, UPDC is likely to generate an additional income of N3.0bn from the sale of some of its properties in the UPDC REIT between Q3-14 and Q4-14. We are, however, cautious to factor this income into our earnings forecasts at this point. The sales of the restaurant business plunged for the second consecutive quarter. Sales dropped by 17.4% yoy in Q2-14, post the 20.0% yoy drop in Q1-14, on lower customer patronage in the North Eastern part of Nigeria. We now expect a flat revenue growth in FY-14E vs. our previous growth forecast of 12.0% yoy, as we are less optimistic of a recovery in sales volumes in the affected region in Q3-14 and Q4-14.  

EPS growth looks subdued in FY-14E, but appealing in FY-15E. We now expect EPS growth of 11.5% yoy and 24.0% yoy in FY-14E and FY-15E, versus our previous forecasts of 16.9% yoy and 20.3% yoy respectively. UACN may, however, surpass our FY-14E EPS expectation if the N3.0bn potential income is generated by UPDC between Q3-14 and Q4-14.

We maintain our BUY recommendation on UACN with a revised 12-month TP of N74.14. The stock is trading on CY-15E    P/E and EV/EBITDA of 15.0x and 6.0x respectively vs. our Nigerian consumer sector coverage average CY-15E P/E and EV/EBITDA of 23.9x and 11.1x respectively.


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