• UAC of Nigeria Plc “UACN” reported a16% YoY rise in revenue to N30.5 billion for H1 2012 which lags our forecast by 7%. Growth was underpinned on improvement across its core subsidiaries but contributions from its restaurant business have dipped considerably - weighing on the group - following the full-franchising of all its outlets.
• On a positive note, Grand Cereals Limited “GCL” – its agro-allied business - consolidated its increasing importance to the group with a 43% YoY rise to N12.6 billion in revenue--a 7pps rise in contribution to group’s revenue to 41%--in H1 2012. It would also appear that its real estate subsidiary, UACN Property Development Company Plc “UPDC” is successfully implementing its strategy to increase exposure to the mid-tier real estate market going by the 47% YoY rise in revenue; which saw the contribution to the group’s revenue rise 4pps to 18% in H1 2012 from H1 2011.
Figure 1: Breakdown of Revenue Contributions to Group
Taking advantage of in-season supply of inputs
• At 28% in H1 2012, gross margin was 1pps short of both the comparable period in 2011 and our forecast. However, it expanded 9pps QoQ to 33% in Q2 2012 as input costs, especially for GCL, moderated on the back of in-season supply. The 46% YTD rise in inventory to N16.9 billion suggests the group is shoring up supplies; especially for GCL which was caught unawares following the federal government’s decision to close some of the northern borders to neighboring countries where it sources these inputs.
Admin expense weighs on operating margin
• The 29% YoY rise to N3.9 billion in administrative expense in H1 2012 was a pressure point for operating efficiency. Whist the ratio of selling and distribution expense to sales was stable at 2% YoY in H1 2012; it was the 150bps rise to 14% in the ratio of admin expense to revenue that accounted for the 1pps YoY decline in operating margin to 13% in H1 2012. This is a concern because we had expected this ratio to trend lower on the back of the full-franchising model, which relieves the group of the operating cost of running the restaurant business.
Figure 2: Quarterly Trend in Ratio of Various Costs to Revenue
PAT in line as finance cost pressures mount
• The N8.7 billion reduction in short-term borrowing to N10.6 billion for H1 2012 is a 34% YTD decline. However, long-term borrowing rose 6% QoQ (23% YTD) to N21.7 billion and suggests UACN is reversing out of short-term loans to more secure long-term lines. Overall, finance cost rose 48% YoY to N1.2 billion in H1 2012 despite the 4% YTD dip in total borrowing to N32.4 billion; probably reflecting the effect of the rising lending rates in the current interest rate environment.
• PBT and PAT rose 11% YoY and 17% YoY to N3.5 billion and N2.1 billion for FY 2012 to put pre-tax and net margin at 11% and 7%, respectively; the former deteriorating from 12% whereas the latter was unchanged from H1 2011.
However, PBT had surpassed our forecast by 15% on the back of our expectation for restructuring charge to former employee of its restaurant businesses closed in Q1 2012 but the higher effective tax (38% actual against our 25% forecast) was responsible for the 1% variation between our forecast and actual PAT.
Moderate revisions to our forecasts leave ratings unchanged
• Unlike the non-food packaged goods segment, the food producers have been somewhat resilient to recent weaknesses on consumer discretionary spending and slowing bank lending to the real sector –as we anticipated. We believe UACN will be further shielded by the contributions of GCL and UPDC, but in reflecting our anticipation for slower bank lending to the real sectors, we revise our FY 12 revenue 7% lower to N65.6 billion from the previous forecast.
• We also revise our gross margin forecast to 30% assuming in anticipation of greater margin stability through YE 2012, especially as we believe inventory build up at its units (especially for GCL) on the back of in-season procurement of raw material will provide some immunity to price shocks. However, the recent uptick in operating costs have factored in our decision to revise the forecast for ratio of operating expense to revenue to match current levels at 15%, up from 13.5%.
• We also annualized the net finance cost to N2.4 billion; assuming it maintains the current leverage ratio; though GCL shareholders are considering a right issue in H2 2012 with part of the proceeds aimed at augmenting working capital. We will also be clarifying with management on the previously communicated restructuring charge from recent divestment from its restaurant business—which we still reflect in our H2 forecast though it didn’t materialize in Q2 as expected-- especially as it pertains to staff remuneration. We also adjusted our effective tax rate higher to match current levels.
Following these adjustments, we revised our PBT and PAT forecast 10% and 5% higher to N6.6 billion and N4.6 billion, respectively.
• UACN recently announced MOU with Livestock Feed Plc and Portland Paint of Nigeria Plc, as part of its inorganic growth strategy to further harness opportunities in the agro-allied and chemical paints sectors, respectively. Whilst a successful deal with this companies would easily increase the market share and competitive position of the respective UACN’s subsidiaries – GCL for agro-allied sector and CAP Plc for the chemical and paint sector; it is clear that the specifics of these deal--especially pricing—would be the key determinant of value, and will be seeking management’s insight on the acquisition to be communicated in follow up report after next week’s conference call.
• The changes resulted in a modest 4% upward revision to our fair price estimate to N35.04, a 3% premium to today’s close. The current PE and price/sales at 11x and 0.8x are also higher than peer average of 8x and 0.2x; hence maintain our NEUTRAL rating on the stock
ARM ratings and recommendations
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