UAC OF NIGERIA PLC FY'17 - Dismal FY’17 earnings, strategic review on course

Dismal FY’17 earnings, strategic review on course                                                          

Despite an 8% y/y rise in Revenue, UAC of Nigeria (UACN) recorded a 79% y/y decline in PAT (₦1.3 billion) - weakest bottom line performance in 16 years. The dismal performance was driven by sharp rises in expense lines which outpaced weak topline growth. Notably, FY’17 gross profit moderated 6% y/y following a 261bps deterioration in gross margin – specifically dragged by cost pressure from expensive raw materials procured in Q4’16/Q1’17. Earnings were further undercut by a jump in net interest expense, up 218% y/y to ₦4.3 billion (Vetiva: ₦3.8 billion), as interest rate on bank loans rose 521bps y/y to 19%. Furthermore, following a higher than expected effective tax rate in the final quarter, bottom line turned negative in Q4’17 with overall FY’17 profit after tax coming in 59% lower than we had expected at ₦1.3 billion.                                                   

The tough operating environment and changing industry dynamics in Nigeria has weakened earnings over the past few years - exposing vulnerabilities in UACN’s business model. In light of this, and given the new face of the Conglomerate’s Management team, a holistic business review is underway to reposition the business on the path of organic growth and profitability. That said, we cautiously forecast a 4% y/y revenue decline to ₦86 billion, while PAT is expected to recover from the FY’17 low base to ₦4.0 billion – supported by better cost containment expectations. We revise our 12-Month post rights issue Target Price to ₦20.87. However, given the expected changes in the business structure upon completion of the strategic review, we place UACN on a HOLD until further notice.