UAC OF NIGERIA PLC 9M'17 Earnings - Weak operating quarter, Q4'17 earnings to recover

UACN’s 9M’17 results showed a 21% y/y rise in revenue to ₦69 billion, albeit 5% below Vetiva estimate - following an underperformance in Q3’17. Whilst UACN recorded its first gross margin expansion in six quarters in Q3’17 (up 109bps q/q to 16%), a surge in OPEX in the quarter weakened operating margin to 2% (Vetiva: 7%). Performance also came in weaker on a y/y basis with gross margin weakened by persistent cost pressures across most operating divisions – down 604bps y/y to 16%. Despite strong operational efficiency (OPEX to sales ratio declined 197bps y/y to 12%), operating profit declined 38% y/y and was 28% below our estimate to ₦3.0 billion for 9M’17.                                                           

However, following a moderation in borrowings, net finance expense was 14% lower than our estimate at ₦3.1 billion (9M’16: ₦840 million), albeit 272% higher y/y amidst elevated interest rates. Also supported by a ₦1.5 billion one-off profit on sales of investment properties, 9M’17 profit after tax came in 4% above our estimate at ₦2.2 billion, though 55% lower y/y.  Overall, we revise our FY’17 revenue estimate 3% downwards to ₦93 billion (Management’s guidance: ₦100 billion), reflecting the deviation in Q3’17. We revise our FY’17 net finance cost estimate 16% lower to reflect the improvement and expected moderation in the expense line going forward. Overall, reflecting the miss in operating earnings in Q3’17, we revise our FY’17 EPS estimate and 12-month Target Price lower to ₦1.66 (Previous: ₦1.84) and ₦23.75 (Previous: ₦25.68) respectively.