- H1’18 Revenue down 22% y/y amidst notable weakness in Animal Feeds
- Mixed trend in operating costs drives EBIT margin 91bps lower y/y
- Lower finance expenses offset weaker operating profit, PAT up 14% y/y
- Earnings estimate little changed, HOLD rating reiterated
Animal Feeds rout persists, small segments record mild recovery
UACN released its H1’18 financial statements showing a 22% y/y decline in revenue to ₦37 billion, marginally behind our ₦38 billion estimates. Whilst there has been a notable improvement in topline performance of the Paints (+17% y/y), Logistics (+19% y/y) businesses and Packaged Foods (+18% y/y), the major drag to headline revenue remains Animal Feeds, UACN’s largest business segment – down 38% y/y. Amidst the impact of unfavorable market dynamics on both volumes and prices in the segment (see Animal Feeds sector update in H1’18 Outlook Report ‘In the shadow of the polls’), UACN has also reported disruptions from the pastoral disputes in Plateau State. Meanwhile, the dismal performance of the Real Estate (-46% y/y) business remained driven by lower rental revenue and housing sales.
Net finance expense moderation supports earnings growth in H1’18
While Cost of Goods sold declined at a faster pace than topline (-26% y/y vs. our -23% y/y expectation), operating expenses advanced 11% y/y, with OPEX to sales ratio rising 450bps y/y to 15.3% (Vetiva: 14.7%). As such, H1’18 EBIT declined 30% y/y to ₦2.7 billion, albeit in line with Vetiva estimate. The bottom line for the period was however strongly supported by a 57% y/y reduction in net finance expenses, a benefit from the company’s capital restructuring in Q1’18. Supported by this, H1’18 profit before tax rose 15% y/y – in line with our expectation at ₦2.1 billion. However, following a much lower than the expected tax rate of 22% recorded in Q2’18 (Vetiva: 29%, Q1’18: 27%), profit after tax came in 7% ahead of our estimate.
Mild earnings forecast upgrade, HOLD rating maintained
According to UACN’s H1’18 results press release, Management has begun to take decisive steps to reposition its businesses following its strategic review, and the company believes the improvement recorded across a number of subsidiaries in Q2’18 can be partly attributed to these moves. We look forward to an upcoming session with the Management (7th August 2018 Conference Call) to gain further insight into expected plans for its subsidiaries, particularly on moves surrounding the loss-making Animal Feeds and Real Estate businesses.
Given that major line item printed in line with our estimates, we make only modest adjustments to FY’18 forecasts. Particularly, after adjusting our cost estimates, our FY’18 EBIT margin is unchanged at 7.4%, albeit our EBIT estimate is little changed at ₦6.0 billion (Previous: ₦6.2 billion) following a marginal downward revision to our revenue estimate. Meanwhile, with UACN’s cash flow further strengthening in Q2’18, following inflow of proceeds from Grand Cereals’ Rights issue, we maintain our interest expense estimate for FY’18 amidst the reduced need to fund the working capital intensive business with short-term bank loans. Overall, our FY’18 profit after tax forecast is revised to ₦3.5 billion (Previous: ₦3.2 billion), supported by a downward revision in our tax rate estimate to 26% (Previous: 30%). Our 12-Month Target Price is revised marginally upward to ₦20.86 (Previous: ₦20.16), we, however, maintain a HOLD rating in anticipation of any substantial decisions made at the strategic review.
