November 29, 2019
By FBNQuest Research
Marked increases to earnings forecasts
UACN’s Q3 2019 PBT beat our forecast by 87%, thanks to robust non-operating gains from other ancillary segments, and management’s restructuring exercise which we had not yet modelled. Post-restructuring, the loss-making real estate business – which recorded a pre-impairment loss of -N2.0bn for 9M 2019 – is now being accounted for as discontinued operations. Q3 earnings from the other core businesses were however broadly weaker than our forecasts. Notably, PBT for the food and restaurant businesses were 48% behind our forecast while the logistics and paints businesses missed by 24% and 2% respectively. In addition, the animal feeds and nutrition business posted a loss of -N75m versus our forecast of N177m.
Nevertheless, the effects of these negative surprises were muted by non-operating gains. As such, PBT for the quarter – ex-real estate – tracked 5% ahead of our forecast. Going into 2020, we see the challenging environment continuing to weigh on core businesses. That said, stripping out the real estate business from our model, our PBT forecasts for 2019-21E are up by an average of 45%. Another positive for earnings in the near term stems from the ongoing sale of the logistics business for US$2.4m. This potentially boosts 2019/20 profitability and cash flow, though we have not yet modelled this sale given that a conclusion date for this transaction has not been provided.
Our sum-of-the-parts valuation implies a price target of N13.8, which is around 27% higher than previous. Our new price target implies a potential upside of 88% from current levels. Despite the tough consumer landscape, we consider the expected y/y improvements in UACN’s quarterly earnings, along with the considerable upside potential, as strong positives. We therefore retain our Outperform rating on the shares.
Q3 2019 PBT up 54% y/y
Q3 sales for the group increased 14% y/y to N20.4bn, while gross margin expanded by 223bps and net interest expense fell by -28% y/y. These drove the y/y increase in PBT to N2.1bn. Sequentially, sales declined by -5% q/q while PBT declined by -11% q/q, Compared with our forecasts, sales were in line, gross margin beat by 25bps, while other income was 9.3x higher. PBT was therefore 87% ahead of our forecast of N1.1bn.