Thursday, May 13, 2021

UAC of Nigeria Q2 2017 Results Review – High Business Costs Weighed on H1 Performance

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7% cut to our EPS estimates over the 2017-18E period
UACN’s earnings remain under pressure from rising costs across its various businesses. The firm posted PAT of N450m, down -37% y/y and -18% q/q respectively. The food & beverage segment accounted for c.82% of Q2 sales. Although UACN’s animal nutrition business continues to post double-digit topline growth (46% y/y on average), rising input costs and relatively expensive debt weighed on profitability. In Q2, PBT margin for Grand Cereals contracted -260bps y/y to 3.0% while Livestock Feeds posted a loss before tax of –N139m.

UACN’s other businesses also contend with similar headwinds. Following discussions with management, we expect modest price increases across various products in the food & beverage category. Relatively softer input costs due to improved fx supply for imports and the harvest season in H2 are also supportive. As such, we see overall business costs easing in H2.

However, we have cut our EPS estimates over the 2017-18E period by 6.6% given that Q2 earnings missed our forecast by c.21%. Our price target of N26.0 holds because we have rolled forward our valuation to 2018. Year-to-date, UACN shares are flattish compared with a broad market gain of around +37% and has remained on the sidelines of the market’s recent rally.

Given capital raising efforts across various UACN subsidiaries it appears that dilution fears continue to weigh on investors’ minds. Nonetheless, we retain our Outperform rating on the stock due to the valuation gap to our fair value estimate. At current levels, UACN shares are trading on a 2017E P/E multiple of 18.7x for an average EPS growth of 52% over the 2018-19E period.

Q2 2017 PBT down -63% y/y to N805m
In Q2 2017, while sales of N23.5bn grew 23% y/y, PBT declined -63% y/y to N805m. A gross margin contraction of -686bps y/y to 15.0% and to a lesser extent a -53% y/y decline in associate income more than offset benefits coming through from topline growth. Other income, up significantly, was boosted by sales commissions, service charges and professional fees from UACN’s real estate business. Opex came in flattish y/y.

Sequentially, sales declined by -6% q/q while PBT was down -2.9% q/q on the back of strong other income growth (up +724% q/q). Compared with our estimates, while UACN’s sales were in line with our forecast, PBT came in behind our N1.2bn estimate by around 35%. Negative surprises on both net finance charges and opex offset positives coming through from the other income line.

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