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UAC Nigeria Plc - OPEX pressure wipes margin gains in Q4 19

• UAC Nigeria released its unaudited result for FY 2019 wherein it reported a profit from continuing operations of N6.1 billion (EPS: N2.14)- coming from its re-stated FY 18 PAT of N5.5 billion (EPS: N1.91). Relative to our estimate, revenue and profit deviated by 0.3% and 1.1% respectively. However, incorporating the loss from discontinued operations takes the earnings position to a loss of N9.3 billion. On its continuing operations, the outturn stemmed from one-off sale of its investment property which helped shoulder the OPEX pressure.
• For us, the result further confirm our concerns on increasing OPEX (See our previous report: ) which is yet to translate into improved sales. For context, operating expense increased by 23% YoY, while sales only increased by 11% YoY over FY 19. While the management has communicated its drive for operational efficiency as its key strategy this year, we are less optimistic of its success this year.
• Elevated OPEX trump margin gains. While we have seen a lot of re-structing in UACN which started since last year and partly explains the jump in operating expense – both admin and S&D expenses. We believe a 71% YoY (45% QoQ) jump in OPEX to N4.8 billion is unjustified when compared to a 3% YoY growth in sales to N23.4 billion over Q4 19. Though we saw gross margin improve by 311bps YoY to 22.3%, increased operating expense left EBIT lower by 36.5% to N1.15 billion. and EBIT margin compressed by 200bps to 4.9%.
• Lower finance income further pressure earnings . Overall, PAT declined by 42.9% YoY to N1.41 billion over Q4 19 with related EPS at N0.49. The bottom line was further pressured by the lower finance income – mirroring the lower cash balance – which offset the gains from lower effective tax rate (-214bps to 9.3%). While we await release of the audited numbers, our last-communicated FVE prints at N8.96 which translates to a SELL recommendation relative to the current market price. UAC trades at a P/E of 4.6x which is a discount to its Bloomberg MENA peer average of 16x.