UACN PLC Q1'18 - Weak Q1’18 Results, PAT 23% Below Estimate

UACN’s Q1’18 results showed a 25% y/y and a 10% q/q decline in Revenue to ₦18.3 billion (Vetiva: ₦19.7 billion), the lowest quarterly Revenue in eight quarters. The performance was driven by sustained weakness in the Animal Feeds (-40% y/y) and Real estate (-62% y/y) businesses, both impacted by intense competitive pressure and unfavourable demand conditions respectively. Gross margin in the quarter came in at 19.5% vs. our 21.0% estimate – howbeit an improvement from the 16% recorded in Q1’17. We believe higher prices of some of UACN’s locally sourced grains, such as maize, so far this year may have contributed to the margin underperformance. With this, gross profit came in at ₦3.6 billion, 14% and 11% below Vetiva estimate and Q1’17 respectively.                                                                        

Operating profit margin (Q1’18: 5%, Q1’17: 7%, Vetiva: 8%) was undercut by higher Operating Expenses as the company stated that it made notable investments in marketing and distribution for its packaged food products in order to support market penetration. As such, Operating profit came in at ₦950 million, below our ₦1.6 billion forecast and 45% lower y/y. Overall, we revise our FY’18 profit after tax forecast to ₦3.2 billion (Previous: ₦4.0 billion). However, supported by a lower risk free rate assumption (following recent yield moderation), our 12-Month Target Price is revised only marginally downward to ₦20.03 (Previous: ₦20.87). Hence we maintain our HOLD rating on the stock. We look forward to Management’s H1’18 Conference Call (31 July 2018) and await details on the conclusions from the wholistic strategic review of the businesses by the new management team.