UAC of Nigeria PLC H1'17 - Earnings dip as input and interest costs bite

Earnings dip as input and interest costs bite                                                   

UAC of Nigeria recently released its H1’17 financial results showing a strong 32% y/y growth in topline to ₦48 billion. The Food & Beverages and Real Estate segments remained the strongest performing of the five segments, with revenue up 37% and 77% y/y respectively. Specifically, the Feeds businesses (Grand Cereals and Livestock Feeds) provided the largest boost to Food segment revenue. UACN’s margins continued to reel under significant cost pressures trailing the business from a turbulent 2016. Gross margin contracted 638bps y/y to 16% in H1’17. Contrary to our expectation and the sector wide margin recovery trend in Q2’17, UACN’s gross margin declined even further in Q2’17 to 15% (Q1’17: 17%).             

Net interest expense rose from ₦366 million in H1’16 to ₦2.5 billion in H1’17 amidst much higher interest rates on loans (with rates on some bank loans as high as 24%). Coupled with a 56% decline in contribution from UPDC’s Real Estate Investment Trust (REIT), H1’17 PAT came in 40% below our estimate and 55% lower y/y to ₦1.2 billion. We revise H2’17 gross margin to 18% (Previous: 20%). Also, we maintain our ₦4.6 billion net interest expense estimate for FY’17 as interest cost burden persists. Thus, we revise our FY’17 EPS estimate and Target Price to ₦1.40 (Previous: ₦1.74) and ₦25.65 (Previous: ₦28.68) respectively. 

That said, UACN remains determined to reduce this debt burden. The Group is in the process of raising ₦15.4 billion via a Rights Issue, which is currently awaiting regulatory approvals. According to Management, a major portion of the proceeds raised will be channeled towards funding requirements for the highly working capital intensive Agro-allied businesses, thereby reducing its expanded bank facilities. Also, for the highly leveraged Real Estate business (UPDC), Management has stated its intention to raise a 3-yr ₦20 billion corporate bond which is expected to come at a cheaper interest rate, compared to current bank borrowings. Both the Rights and Bond issues are scheduled for September/October period in 2017.            

UAC of Nigeria PLC (UACN) is one of Nigeria’s largest and one of the oldest diversified companies with operations that span the food, agro-allied, real estate, paint and logistics segments. The company runs a holding company business model with majority (controlling) stake investments in ten subsidiaries at present.