November 20, 2020/Proshare
by FBNQuest Research
Material increases to earnings and price target
We have raised our price target for UAC of Nigeria (UACN) by 61% to NGN11.9 and upgraded our rating to Outperform from Neutral, following the company’s Q3’20 results, which exceeded expectations. PBT of NGN1.4bn overshot our estimate by 7x, thanks to a faster-than-anticipated recovery from the lockdown-induced demand slump in Q2. Interestingly, sales from the non-essential businesses – Paints (+89% q/q), Packaged Foods (33% q/q), and Restaurants (75% q/q) – delivered the strongest q/q rebound. According to management, topline growth from these businesses was mostly volume driven.
There were, however, meaningful price increases across the Animal Feeds business, which was up 12% q/q. Looking ahead, we see UACN’s pricing power as a positive in Animal Feeds despite competitive headwinds, along with its market leadership in Paints and Packaged Food offerings. Our forecast changes translate to a 66% increase in 2020f EPS, and 17% average increase in 2021-22f. Year-to-date, UACN shares have shed -8%, underperforming the broad market index which is up 29%. The shares are currently trading at a 2021f P/E of 5.1x for an average EPS growth of 27% in 2020-22f.
Our bullish bias towards the stock is also fuelled by management’s restructuring initiatives namely:
- a binding agreement for the sale of 51% equity in loss-making real estate business UPDC to Custodian Investment
- booked proceeds from the sales of shares of logistics subsidiary MDS Logistics to Imperial Logistics; and
- possible synergies and efficiency gains from a recently-announced merger between the Paints subsidiaries. Given a potential cash increase from the first two transactions, we have doubled our 2020f dividend forecast to NGN0.67/share. Our new target price reflects a higher sum-of-the-parts valuation and implies a potential upside of around 50%.
Q3 PBT down -25% y/y
Sales were up 11% y/y. However, earnings deteriorated y/y in because of a 7% increase in opex, and -88% and -42% declines in other income and net interest income. These negatives fully eroded the topline growth.
On a sequential basis, Q3 PBT of N1.4bn compares with Q2 pretax loss of -NGN264m. This was mainly helped by a 24% q/q increase in sales. Relative to our forecasts, sales and gross margin beat by 11% and 358bps respectively. UACN earned net interest income of NGN205bn versus our expense forecast of -NGN78m. These drove the 7x PBT positive surprise.