Despite the Recession, UACN Beats the Odds 

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PERSPECTIVE

By Sani Tureta

The last 16 months have been harrowing for Nigerian’s economy, with the nation’s Gross Domestic Products (GDP) sliding to negative in the first quarter of 2016. Figures from the National Bureau of Statistics (NBC), speak volumes. According to the latest NBC statistics, Nigeria’s second quarter 2016 GDP declined by -2.06 per cent. Annual inflation rose to 17.9 per cent in September from 17.6 per cent in August, and food inflation rose to 16.6 per cent in September from 16.4 in August this year. Technically, the Nigerian economy has been in recession since the beginning of this year, with the real sector, particularly manufacturing, badly affected.
The recessed economy has resulted in many manufacturers closing shops and workers thrown into the already saturated labour market. The persistent forex crisis compounded the woes of many businesses. This is why the nation’s unemployment figures are frightening.  According to the NBC, the total number of Nigerians who became unemployed within the first and second quarter of 2016 was 2.6 million. The NBS said further that the country’s unemployment rate grew from 12.1 per cent in the first quarter of 2016 to a record high of 13.3 per cent in the second quarter. The figures for the 3rd quarter of 2016 are expected to be horrible. This should be expected because almost 3000 members of the Manufacturers Association of Nigeria have shut down. These are the people providing the jobs.
Amid these gory economic tales, comes the enchanting 2016 Quarter 3 financial result of the UAC of Nigeria PLC. Though, its core areas operation – construction, food/beverages and real estate activities – are slowing down, but due to pragmatic and creative management, this leading diversified conglomerate headquartered in Lagos, with operations in foods, paints, logistics and real estate, has announced an inspiring unaudited results for the nine month ended 30 September 2016. It defied all the challenges of a recessed economy to post 5 per cent Year on Year topline growth for the nine month period. UACN recorded a profit after tax of N4.3 billion, up by 42%, compared to the N3.1 billion recorded in the same period last year.
Larry Ettah, UAC of Nigeria PLC Group Managing Director & CEO remarked: “Our performance in the 9 months to September 2016 demonstrates the resilience of our business and the effectiveness of our strategy in a rather difficult operating environment. Markets remained soft with declining purchasing power, especially in our real estate and paint categories. Forex scarcity/rate volatility and input material shortages are leading to frequent and significant cost increases and production disruptions.
“Grand Cereals operations delivered commendable results in the quarter, despite challenges in the operating environment. Management is focused on achieving earnings stability in the remaining months of 2016.”
Ettah has every reason to be happy. The Group’s financial highlights are in the period under review are exciting. It reported a turnover of N57.7 billion, up 5% (N55 billion September 2015); Gross profit of N12.5 billion, up 2% (N12.2 billion September 2015); other income of N1.8 billion, up 92% (N933 million September 2015); Profit Before Tax of N6.3 billion, up 27% (N4.95 billion September 2015) and Profit After Tax of N4.3 billion, up 42% (N3.1 billion September 2015).
Key subsidiary performances were also thrilling. UPDC PLC, its real estate division recorded Profit Before Tax of N133 million (Loss of 110 million September 2015).
UAC Restaurants Limited recorded Profit Before Tax of N3.5 million (Loss of N80.2 million September 2015) while UAC Foods Limited (foods, ice‐cream, fruit drinks and spring water) recorded Profit Before Tax of N1 billion, up 16% (N868 million September 2015).
Grand Cereals Limited (animal feed, cereal meal and edible oil) recorded Profit Before Tax of N1.75 billion, up 48% (N1.18 billion September 2015) while MDS Logistics Limited (Logistics) recorded Profit Before Tax of N1.1 billion, up 42% (N788 million September 2015)
CAP PLC (Paints) recorded Profit Before Tax of N1.5 billion, down 12% (N1.7 billion September 2015)
Livestock Feeds PLC (animal feed) recorded Profit Before Tax of N157.9 million, down 21% (N200.8 million September 2015) while Portland Paints and Products Nigeria PLC (Paints) recorded a
Loss Before Tax of N31.4 million (Loss of N78.1 million September 2015)
A statement from Exotix Partners, a UK based leading frontier market firm reads. “UACN’s Q316 results are quite strong, beating our expectations. They reflect a recovery of earnings from low base, but also the resilience of the business in the current operating environment, placing it in the top quartile of peers that have reported this quarter. A notable advantage for the business is that it is significantly less geared to imported raw materials relative to local consumer company peers. More so, the diversification of group businesses makes for less earnings vulnerability to macroeconomic cycles. Performance during the quarter was driven by a strong recovery in the animal feed business as well as FX gains in the logistics business. The property business sustained profitability in the second consecutive quarter, but this was purely on a low base effect, as market dynamics remain challenging. These more than offset weaknesses in the packaged food and paint businesses – both of which experienced relatively measured weakness in earnings. As with most of its peers, the group did experience an increase in input and operating costs, reflecting the inflationary effects of the weaker Naira.
“We see some upside to our current FY16f earnings estimates, in light of the strong Q316 performance, barring any sharp deterioration in the economy and the naira in the following months. In which case, we expect that FY16f EPS could exceed that of the previous year, albeit with a weaker Q416, owing to a high base in Q415, driven by particularly strong trading income. We expect that UACN will consolidate on gains of Q316 in Q416, particularly in animal feed, logistics as well as rein-in costs weighing other businesses such as packaged food. Consequently, we maintain our Buy recommendation on the company’s stock. Moreover, UACN remains the most attractive consumer company in our coverage from a valuation perspective, trading on a FY17f P/B ratio of 0.8x.”
The company’s animal feed businesses earnings also rebounded and continue to witness relatively strong growth in volumes, particularly in Q316 owing to what the management described as market share gains, particularly in fish feed from importers and fringe players who are not competitive in the current environment.
It states further: “Grand Cereal and Livestock Feed revenues grew a notably 39% YoY and 30% YoY respectively. This in addition to price increases and operating efficiencies during the year, which helped to strengthen profitability as Grand Cereal and Livestock Feed witnessed a 141% YoY and 13% YoY increase in PBT respectively. We believe that the company can sustain this trend in the coming quarters, sustained by an ease in grain prices (given the ongoing harvest season) and better sales in maize grits and meals.
“MDS Logistics’ earnings (+165% YoY in PBT) benefited from FX gains in the quarter, which are a reflection of dollar linked earnings, mainly from its pharma business. This largely explains the significant rise in PBT margins (55.5% in Q316 vs. 24.3% in Q216 and 15.5% in Q316). Other businesses (FMCG and Telco) are being challenged by weaker client businesses, which have succumb to pressure from the weak economic environment. To mitigate the impact, management is signing-up new accounts and further diversifying the sectors from which it generates its business.
“UPDC weighed by operating costs. UACN’s property business witness an improvement in profitability YoY (PBT of NGN11mn in Q316 vs. loss of NGN614mn in Q315) due to a low base effect, but was quite weak in comparison to performance in Q216 (NGN247mn) due to a sharp increase in operating costs (+309% YoY), which we would like to understand. Furthermore, there was a decline in its share of profit from its REITs subsidiary, which highlights a decline in rental income following its inability to lease one of its residential properties – a reflection of the challenging environment.
“Revenue rose sharply in Q316, +139% YoY, but merely the effect of a low base in property sales and hospitality. We believe that the short term outlook of the business remains weak in light of the challenging economic environment, however we expect a sustained improvement in profitability on account of gains from the sale of investment assets as the company seeks to balance its portfolio.”
UACN’s paint earnings were generally weak in Q316, but resilient, with overall earnings declining. It said CAP was experiencing a sharp decline in paint volume on account of weakness in construction activity and a downward trade to cheaper options, especially as the market raised prices to accommodate cost pressures.
Exotix added: “Input costs surged on account of weakness in the naira, given the relatively high gearing of the business to dollars/imported raw materials and finished paint (Dulux Trade). These more than offset marginal gains at Portland Paints, which sprang back to profitability in Q316 after losses in prior quarters due to a rebound in volumes, increase in prices, a one-off FX gains and operating efficiencies.”
The company’s packaged food business appears to have suffered a further softening in volume growth highlighted in the mere 2% YoY increase in Q316 revenue, after a relatively strong trend in Q116 and Q216.
“This suggests a correction in volumes given a highly successful Gala marketing campaign over Q415/Q116 as well as quite resilient competition despite the weaker environment, which have allowed for market share gains by sector notable players over the last few quarters. This has prevented the company from raising prices to accommodate the surge in input costs – largely responsible for the 20% YoY decline in PBT during the quarter, after a strong 20% increase in Q216. Consequently, PBT margin fell to 6.7% in Q316 vs. 8.1% in Q216 and 8.7% in Q315.
“Group profit margins are strong YoY and QoQ due to the relatively stronger earnings trend in Q316 discussed earlier. EBIT margin rose 3.8ppt YoY and 3.4ppt QoQ to 12.2% in Q316; however net margin witness to most increase YoY, +8.6ppt to 8.2% on account of a low base in Q315, weighed by higher effective taxes (27.4% in Q316 vs. 110.5% in Q315).”
“UACN’s net operating cash flow improved significantly in Q316 to NGN3.3bn vs. NGN2.0bn due to a strong operating profit and better working capital management during the quarter; not surprising as this is generally a seasonal trend at the company. Gross debt is slightly lower QoQ, reflecting the repayment of commercial bank loans during the quarter. However, management highlights that the commercial papers raised earlier in the year have now been refinanced having matured in October.”
These figures are heartwarming. No doubt, the Leadership of UACN has delivered on its promises. UACN’s shareholders are happy. Distributors and consumers are happy. Federal and state tax agencies are happy. It’s clearly a win-win situation for everybody associated with UACN. Shareholders are all looking forward to an enthralling Q416 report and bumper dividends.

– Tureta is a Lagos-based financial analyst