EUR 20.14 For Business Accounts Only

UAC of Nigeria: Difficult market terrain weighs on outlook

​Difficult market terrain weighs on outlook

• Outperform rating maintained on valuation upside potential: UAC of Nigeria’s (UACN) Q3 2015 numbers came in weaker than expected due to negative surprises in sales, opex and finance costs. Additionally, UACN incurred an asset impairment charge of N473m for investments in its real estate business. This follows a N2.1bn asset write-down in Q2. At this point, we assume that an impairment of similar magnitude in Q4 is unlikely. However, difficult macroeconomic conditions, fx pressures and softness in the real estate market are likely to persist in the near term. As such, we have cut our EPS estimates over the 2015-16E period by -21.0%. Our new price target of N42.1 represents a reduction of 19.6% and implies a potential upside of 62%. At current levels, UACN shares are trading on a 2015E P/E of 19.6x for an EPS growth of 51% over the 2016-18E period. Ytd, UACN shares have shed -23.5%, slightly worse than the market’s performance over the same period. We retain our Outperform rating.

• Q3 PBT and PAT down -58% y/y and -123% respectively: In Q3, while sales declined by -15% y/y to N17.2bn, PBT declined by a much wider margin of -58% y/y to N715m. The y/y decline on the PBT line was primarily driven by the poor performance of CAP and UPDC, UACN’s paints and real estate businesses respectively. Specifically, while UPDC reported a pretax loss of –N614m in Q3, CAP’s PBT declined by 20% y/y to N451m, making it the first y/y decline recorded by the company in recent times. Further up the P&L, a combination of factors including a gross margin contraction of 113bps y/y to 21%, a 15.6% y/y rise in opex to -N3.1bn and a 264% y/y spike in interest expense also contributed to the marked y/y decline in PBT. Sequentially, sales declined by -12% q/q. However, PBT of N715m was well ahead of a pretax loss of -N150m that the company reported in Q2 2015.

• We estimate a 61% y/y decline in EPS in 2015E: We forecast sales decline of around -4% y/y and -50% y/y for UACN’s foods and real estate businesses respectively in 2015E. Both segments have accounted for around 85% of UACN sales on average over the last five years. While we expect PBT for the foods business to decline by -34% y/y, we estimate a loss before tax of –N2.1bn for the real estate business. While the impact of recent Bird Flu incidences and tougher trading conditions are likely to weigh on UACN’s feed mills business, a general slowness in the real estate market remains a concern in the near term. We forecast an EPS decline of around -61% in 2015E.