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UAC of Nigeria Plc: Notes from conference call Q2 17

• On Monday, UAC of Nigeria held its conference where it explained the drivers of H1 17 as well as its prognosis for the rest of the year. Find below key highlights of the discussion.

• Top-line Performance: According to management, the improved top-line performance over H1 17 (+31.6% YoY) reflected impact of price hikes across product portfolio, sales of completed projects at UPDC as well as higher volume at its animal feeds business (Grand Cereals Limited and Livestock). Importantly, only three operating segments (CAP, MDS, UAC Foods) recorded flat to lower revenue while sales in the remaining five subsidiaries rose. The company’s outgoing^[1] CEO, Mr. Larry Ettah, noted that sustained weakness in the real estate sector continued to weigh on demand, whilst corporates desire to cut down cost adversely impacted the logistics business. With regards to UAC foods, Mr Ettah attributed the weak turnover toloss in market share following the company’s attempt to pass-on higher input cost prices to consumers.

• Input Costs: Management noted that despite price increases, the company recorded steep gross margin compression (-6.4pps YoY to a record low of 16%) largely reflecting elevated cereal prices as well as uptrend in flour and refined sugar prices.

• Borrowing cost: According to the group CEO, the upsurge in finance charges reflected monetary tightening which have raised the company’s borrowing cost to 24% in the current year. Management noted that the capital raising success at its subsidiaries as well as planned disposal of a N5 billion investment property at UPDC should lower the company’s need for debt. In addition, the group (UACN) plans to raise a N15.4 billion rights issue in Q4 17 alongside a N20 billion bond for its real estate subsidiary which would be used to refinance currently elevated ST debts. On the back of this, the company’s management projects a moderation in finance charges going forward.

• FX Challenges: UACN’s M.D noted improved dollar availability at the currency markets with the company currently obtaining all required FX at the NAFEX window.

• Outlook: Management guides to further price hikes across its product portfolio over the rest of the year. This, together with sustained demand for Agro-allied products, should boost top-line performance. UACN’s CEO also expects moderation in input cost on the back of naira gains and improved market supply of farm produce in the main harvest season of Q4. In addition, lower diesel prices (energy constitutes 6% of the company’s cost) and capital raising plans, which should reduce the need for expensive debt, should bolster earnings in the second half of the year.

• Our View: We expect price hikes to sustain revenue growth in the seasonally stronger H2 17. Given expected moderation in a key driver of food inflation (transport cost), we project a more modest rise in COGS especially in the last quarter. Hence, we expect an improvement in gross margin over the second half of the year. Elsewhere, the late timing of the planned debt refinancing and capital raise should taper potential impact on interest charges over 2017. Nonetheless, we expect pressures on this front to be offset by expected sales of a N5 billion investment property at UPDC, which buoys our earnings outlook for the company. UACN trades a current P/E of 9.9x vs. 18.7x for its Bloomberg middle east and Africa peers. We have a NEUTRAL rating on the stock (FVE: N19.04).