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UAC OF NIGERIA PLC H1'18 Earnings -Animal Feeds rout persists in Q2’18, as expected

Animal Feeds rout persists in Q2’18, as expected                                                                            

UACN released its H1’18 financial statements showing a 22% y/y decline in revenue to ₦37 billion, marginally behind our ₦38 billion estimate. Whilst there has been a notable improvement in topline performance of the Paints (+17% y/y), Logistics (+19% y/y) businesses and Packaged Foods (+18% y/y), the major drag to headline revenue remains Animal Feeds, UACN’s largest business segment – down 38% y/y. Amidst the impact of unfavorable market dynamics on both volumes and prices in the segment (see Animal Feeds sector update in H1’18 Outlook Report ‘In the shadow of the polls’), UACN has also reported disruptions from the pastoral disputes in Plateau State. Meanwhile, dismal performance of the Real Estate (-46% y/y) business remained driven by lower rental revenue and housing sales.                                                                        

Given that major line items printed in line with our estimates, we make only modest adjustments to FY’18 forecasts. Particularly, after adjusting our cost estimates, our FY’18 EBIT margin is unchanged at 7.4%, albeit our EBIT estimate is little changed at ₦6.0 billion (Previous: ₦6.2 billion) following a marginal downward revision to our revenue estimate. Meanwhile, with UACN’s cashflow further strengthening in Q2’18, following inflow of proceeds from Grand Cereals’ Rights issue, we maintain our interest expense estimate for FY’18 amidst the reduced need to fund the working capital intensive business with short term bank loans. Overall, our FY’18 profit after tax forecast is revised to ₦3.5 billion (Previous: ₦3.2 billion), supported by a downward revision in our tax rate estimate to 26% (Previous: 30%). Our 12-Month Target Price is revised marginally upward to ₦20.86 (Previous: ₦20.16), we however maintain a HOLD rating in anticipation of any substantial decisions made at the strategic review.