UACN: Operational challenges hurt earnings

The increasing cost of operations has impacted negatively on the profit margin of UAC Nigeria Plc as the real sector of the economy continues to battle challenges. Chris Ugwu wtites


The daunting challenges posed by strong macroeconomic headwinds, which include erratic supply of public electricity, depreciating naira, weak logistics, insecurity and other factors have continued to make the business operating environment difficult, especially for the real sector of the economy. With fiscal and monetary headwinds leading to marked reduction in domestic output, and heightened by the ravaging COVID-19, manufacturers have continued to groan under pressure of increased cost of operations. Also, insecurity, infrastructural deficit, particularly poor electricity supply and bad road network have continued to hit hard on manufacturers, at times forcing some of them to fold up.


Given headwinds such as slim consumer wallets, most consumer and industrial good companies in Nigerian have continued to find it difficult to weather the storm. One of the companies affected is UAC Nigeria Plc, which has for considerable period seen drop in earnings. The company, which ended its financial year in December 2019 with a loss, finished the first two quarters of the year unimpressive with a 55.21 per cent drop in net earnings to what market watchers attributed to weak consumer demands, stiffer competition, COVID- 19.



UAC of Nigeria Plc audited fullyear financial report for the period ended December 31, 2019 showed that the conglomerate made a N9.2 billion loss. The group’s revenue for the period stood at N79.2 billion as against N70.4 billion during the comparable period in 2018. This is indicative of a 12.4 per cent increase year on year.


The company’s cost of sales, however, increased by 9.3 per cent to N62.5 billion, up from N57.2 billion in 2018. For the period under review, UACN’s profit before tax stood at N7.4 billion, thereby marking a 22.7 per cent increase compared to N6 billion in 2018. Similarly, the group’s profit after tax increased by 26.1 per cent to N5.3 billion, up from N4.2 billion during the preceding financial year.


Loss for period:

However, UAC of Nigeria Plc reported a loss of N9.2 billion during the period under review. Note that the group had also ran at a loss of N9.5 billion in FY 2018.


According to the group in a filing with the Nigerian Stock Exchange (NSE), the profit after tax for the first quarter ended March 31, 2020 stood at N1.864bn against N996m posted in 2019. The group recorded a profit before tax of N1.669bn in Q1 2020 as against N2.400bn posted in2019, a drop of 30.5 per cent.



Revenue dropped by 2.9 per cent from N20.141bn in 2019 to N19.549bn in Q1’ 2020. Earnings Before Interest, Taxes, Depreciation, and Amortization declined significantly, down 21 per cent y/y to N1.8 billion while the margin weakened by 205 bps to 9.1 per cent in Q1’20. The decline in EBITDA was due to the double-digit growth in OPEX (up 14 per cent y/y), following the increases in selling and distribution ex-dep (up 16 per cent y/y) and administrative costs exdep (up 12 per cent y/y).


Management attributed the growth in OPEX to investments made in marketing and distribution in the animal feeds, packaged food & beverages and paints segments alongside investments made in strengthening management teams across its portfolio companies.


Net Finance Income declined (down 31 per cent y/y) on the back of the decline in finance income (down 25 per cent y/y), which outweighed the reduction in finance cost (down 11 per cent y/y).


The group noted that results for UACN Property Development Company Plc (UPDC), which has been classified as a discontinued operation, are accounted for separately in UAC’s Q1’20 financial statements (in accordance with the provisions of IFRS 5). All figures for Q1’19 have been restated for discontinued operations. It said that following divestment of control in MDS, UAC’s share of profits from MDS’ operations has been reported under “Share of Profit/(Loss) of Associates and JVs” in Q1’20 while MDS results are consolidated in Q1’19. According to reports, the sharp decline in EBITDA coupled with the decline in net finance income pressured earnings, as pre-tax profit from continuing operations declined 30 per cent y/y to N1.7 billion in Q1’20. A higher effective tax rate of 31 per cent in Q1’20 compared with 18 per cent in Q1’19 led to a higher decline in profit after tax from continuing operations, down 42 per cent y/y to N1.1 billion in Q1’20.


However, profit from discontinued operations of N717 million in Q1’20 compared to the loss of N969 million (as stated earlier) led to a growth of 87 per cent y/y in net profit (N1.9 billion in Q1’20 compared to N996 million in Q1’19). EPS rose to N0.85 in Q1’20 from N0.23 in Q1’19.


We, however, note that EPS from continuing operations stood at No.27, down 38 per cent from N0.44 in Q1’19, reflective of the weak operating performance in Q1’20. UAC of Nigeria announced its unaudited results for the half year ended June 30, 2020 with a record of 55.21 per cent decline in profit after tax. According to the group in a filing with the Nigerian Stock Exchange (NSE), the profit after tax during the period under review stood at N1.16 billion against N2.59  llion posted in 2019, representing a decline of 55.21 per cent.


The group recorded a profit before tax of N1.03bn in H1 2020 as against N4.17 billion posted in2019, a drop of 75.29 per cent. Revenue dropped by 8.67 per cent from N40.11 billion in 2019 to N36.63 billion in H1’20. However cost of sales dropped 6.70 per cent to N29.64 billion from N31.77 billion in 2019.


According to analysts at FBNQuest, sales declined -15 per cent y/y to N17.1 billion while gross margin contracted by -342bps y/y to 16.2 per cent, Adding to these negatives, opex increased by 21 per cent y/y to -N3.3 billion while net interest expense plunged -91 per cent y/y to N38 million.


As such, a loss of -N264 million was recorded. On a sequential basis, “sales declined -13 per cent q/q while gross margin contracted by -551bps q/q. Opex increased by three per cent q/q while net interest expense declined by -61 per cent q/q. Relative to our forecasts, the Q2 loss compares with our PBT forecast of N1.3bn because of weaker-thanexpected from sales, opex and net interest expense”.


Challenges/way forward Commenting on the performance, Group Managing Director, Mr. Folasope Aiyesimoju, stated: “Nigeria, along with the rest of the world continues to struggle with the impact of the COVID-19, which is first and foremost a healthcare and humanitarian disaster. “We at UAC have assessed the pandemic’s impact on our people, our businesses and our communities, taking urgent action to protect the health and safety of our employees and stakeholders. We have instituted business continuity plans to ensure operations run smoothly and we monitor these daily.


“We are also contributing towards alleviating the impact of the pandemic on our society. For our Q1’20 performance, we recorded modest top line growth, after adjusting for the reclassification of MDS Logistics. Investments in branding, selling and distribution, as well as talent offset gross profit gains resulting in lower operating profits and margin compression. We believe these investments to be critical to drive sustainable growth and profitability over the long-term.


“We will continue to monitor the effects of the pandemic and will take strategic and operational decisions to improve the resilience of our businesses and capture opportunities as they arise.” Reacting, analysts at FBNQuest said: “We have cut our price target for UAC of Nigeria (UACN) by -26 per cent to N7.4 on the back of a lower sum-of-the-parts valuation, following the Q2 earnings miss. The company recorded a pre-tax loss of -N264 million, largely driven by weaker earnings from the major segments – Paints (-32 per cent y/y) and packaged foods (-99 per cent y/y).


The other businesses were loss making on account of the demand slump during the quarter. “Nevertheless, going forward, we expect subsequent quarterly financials to be underpinned by the following positives: i) between June and July, UACN was able to pass on rising raw material costs from its essential segments, and ii) the planned sale of 9.5 billion UPDC shares to Custodian Investment is expected to improve cash position by N7-8 billion.


“However, given that fx pressures are likely to be sustained, growing earnings in paints and packaged foods will remain challenging. Indeed, products from these segments are more discretionary, making them more vulnerable to the weak growth environment. “In addition, import requirements for paints are as high as 80 per cent of CoGS while the packaged foods business has an indirect fx exposure of around 50 per cent.


We also see UACN absorbing some of the inflationary impact on animal feeds given competitive headwinds in this space.


Taking all these into consideration, our EPS forecasts for 2020-22E have been adjusted down by an average of -31 per cent, driven by marked cuts in paints and packaged foods earnings. “Year-to-date, UACN shares have shed -33 per cent, underperforming the broad market index which is down -6 per cent.


Our new price target implies a potential upside of 27 per cent from current levels. We however expect y/y deterioration in earnings to fuel bearish sentiments in the stock, hence we retain our neutral rating.


Last line

The business climate for UACN like other consumer good companies has remained challenging due to intense competition and hash operating environment.


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