April 6, 2017/ARM Research
Based on recently released FY 16 audited numbers, UAC of Nigeria Plc. (UACN) reported its first growth in operating profit in four years as the combined effect of higher prices and cost containment (OPEX and finance charges) masked sizable input cost pressures witnessed over the period. Though impairment charges at the real estate subsidiary (UPDC) was a worry, one-off gains from the revaluation and disposal of investment property on one hand as well as lower effective taxes on the other ensured earnings reversed its negative growth from prior year.
Rebound in food turnover underpin robust top-line growth
UACN reported its fastest revenue growth in four years over FY 16 (+14.7% YoY) as recovery in the Real estate and Food subsidiaries alongside sustained growth in the Logistics and ‘Other’ businesses trumped lingering pressures in the Paints division. In addition to price hikes undertaken across sub-businesses, management attributed revenue growth in the food division to higher Cereals and fish feed sales.
Cost containment moderate input cost pressures on margin
In addition to price hikes, UACN curtailed margin compression through improved operational efficiency. Particularly, the company cut-back on its marketing, advertising, and communication expenses (-23% YoY) which kept OPEX in check (+0.5% YoY to N10.7 billion). Furthermore, despite a jump in net debt (+24.4% YoY to N20.5 billion), net finance cost contracted 4.3% YoY reflecting conversion of expensive bank borrowings to cheaper commercial paper debt which helped drag effective interest rate on the company’s borrowings lower (-2.5pps YoY to 10.6%). Hence, notwithstanding upsurge in input cost (+18.1% YoY to N67.3 billion) operating profit still rose (+8% YoY to N6.6 billion) over the review period (EBIT margin: -49bps YoY to 7.8%).
One off gains offset impairment loss on earnings
In line with UPDC’s guidance for a potential impairment loss over FY 2016, UACN reported other loss of N2.4billion (FY 15: N49million) stemming from the N748 million impairment of receivables from UPDC metro city and N1.7billion losses on completed real estate projects. Nonetheless, a two-fold YoY jump in other gains to N3.9billion kept PBT largely unchanged at N7.8billion (+0.5% YoY). In addition, amidst a 6.1pps YoY contraction in effective taxes to 27.1% which reflected utilization of previously unrecognized tax credit of N1.4 billion (2015: N973 million), PAT rose more rapidly (+9.8% YoY).
Upbeat outlook leaves BUY rating unchanged
Going forward, we believe waning input cost pressures—a fall-out of downtrend in staple food prices—, higher pricing of the company’s products, increased capital expenditure by the government and potential monetary easing all bode well for the company’s earnings which we project to rise 19.9% YoY to N6.8billion. UACN trades at a current P/E of 7.8x vs. 18.8x for its Bloomberg Middle East and Africa peers.
Largely reflecting a more upbeat outlook, we upgrade our FVE on the stock to N18.86 (previous: N15.95) which translate to a BUY rating.