Chapel Hill Denham Advised Investors to Buy UACN Shares for 94% Upside

Chapel Hill Denham Advised Investors to Buy UACN Shares for 94% Upside

Analysts at Chapel Hill Denham Limited, a leading investment banking firm headquartered in Lagos, has advised investors to buy shares of United Africa Company of Nigeria (UACN) Plc, a conglomerates with diversified interest across various industries.

According to the investment firm, UACN has more than 94% upside potential as analysts upgrade price target forecast from ₦10.18 to ₦11.57.

Traded at ₦6.05 per share on the local bourse Tuesday, investors valued the conglomerates at ₦17.431 billion on 2,881,296,580 shares outstanding.

In a document submitted to the Nigerian Stock Exchange, UAC of Nigeria Plc (UACN) announced that it has signed a binding agreement with Custodian Investment Plc (Custodian) to sell a 51% equity interest in UACN Property Development Company (UPDC).

UACN explained in the release that the transaction is in two phases, Initial purchase of 5.10% of the issued share capital of UPDC and subsequent sale of 45.90% of the issued share capital of UPDC upon receipt of requisite approvals.

The report indicated that UACN will also receive units 650 million units, valued at ₦2.5 billion in the UPDC REIT, with the previously announced unbundling transaction, still in process.

Again, Chapel Hill Denham said on 6 August 2020, the management held a conference call with analysts and investors, and provided further details of the transaction.

“The deal is cheap on valuation”, analysts at Chapel Hill Denham stated.

Based on the details disclosed, the management signed a binding agreements for Custodian to acquire a 51% interest in UPDC at a price per share of 82.5 kobo (which translates to a cash payment of ₦7.81 billion), with 85% (that is, 70 kobo/share or ₦6.64 billion) payable immediately on close of the transaction and the balance upon meeting certain conditions.

These conditions, according to management, are related to some regulatory approvals as well as the performance of some undisclosed assets.

“Our view of the transaction is that Custodian will be paying a discount to an already discounted market value of UPDC”, analysts explained.

Chapel Hill said as at June 2020, UPDC had a carrying value of ₦17.20 billion in the books of UACN, and an equity stake of 93.85% (up from 64.16% in financial year 2019).

UACN’s stake in UPDC increased to 93.85% after converting its ₦15.84 billion bridge loan in UPDC to equity by subscribing to UPDC’s ₦15.96 billion right issues (which was concluded in April 2020).

Analysts at Chapel Hill Denham maintained that based on the carrying value of UPDC assets (₦17.20bn) in UACN’s balance sheet, the transaction is at a 16.45% discount to the purchase valuation of ₦14.37 billion.

Also, using a 30-day Volume Weighted Average Price of UPDC, Chapel Hill estimates the market capitalization (of UACN’s stake) at ₦15.43 billion, which is at a discount of 6.85% to the purchase valuation of ₦14.37 billion.

The transaction is cash accretive to UACN, and will further strengthen its balance sheet.

UACN expects to receive ₦6.64 billion in cash on the close of the transaction, with an additional ₦1.17 billion on the fulfilment of certain conditions.

“We believe this transaction, when completed, will further strengthen UACN’s balance sheet, which has undergone series of restructuring since 2018.

“We note that management has revaluated its core operational strategy to a consumer staples manufacturer, and consequently embarked on three crucial restructuring efforts”, Chapel Hill explained.

UACN restructuring programs entailed deleveraged the group’s balance sheet, exited non-core assets/businesses, tightened working capital management and taken impairment on non-performing assets.

Analysts at Chapel Hill Denham estimated that the deleveraging of UACN’s balance sheet has helped reduce the company’s debt to ₦2.98 billion as at first half of 2020, from ₦24.19 billion as at 2018.

The investment firm noted that UACN’s outstanding debt comprises two facilities by Grand Cereals Limited which include CACS Loan of ₦977 million and CBN Maize Aggregation Loan of ₦2 billion.

Meanwhile, based on contract arrangement for the funds, both facilities are due by November 2020 and December 2020 respectively.

Given a cash balance of ₦20.73 billion in the first half of 2020, Chapel Hill Denham said UACN has the liquidity to offset the loans.

In addition, UACN has divested from Warm Spring Waters Nigeria Limited for a cash consideration of ₦296 million and sold its controlling stake in MDS Logistics to Imperial Logistics for ₦439 million.

The company has also proposed the sale of its controlling stake in UPDC to Custodian for ₦7.8 billion.

“We recall that UACN raised ₦15.50 billion via a rights issue in 2018, which was partly utilised for debt repayment”, analysts explained.

In the first half of 2020, cash & cash equivalents stood at ₦20.73 billion, which was 26.2% higher than the market capitalisation of the company as at 14 September 2020.

“From a valuation perspective, this indicates that the stock is trading at a huge discount and should see a re-rating by the market”, Chapel Hill Denham said.Chapel Hill Denham Advised Investors to Buy UACN Shares for 94% Upside

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The proposed unbundling of the UPDC REIT is still on the table; UACN expects to receive 650 million units in the UPDC REIT.

Recall that in September 2019, UACN announced a proposed twin unbundling of the UPDC REIT (to UPDC REIT shareholders) as well as the unbundling of UPDC (to UPDC shareholders).

While the unbundling of UPDC is now halted (in pursuant of a sale of controlling interest to Custodian), management will continue the unbundling of the UPDC REIT.

UPDC REIT was listed in June 2013 on the Nigerian Stock Exchange (NSE) at a unit price of ₦10.00, but has declined to ₦3.80 (14 September 2020), indicating a 62.0% decline in market value since listing.

In 2019, analysts stated that the management recognised the loss in market value, by recording an impairment loss of ₦14.20 billion on the REIT.

Nonetheless, Chapel Hill explained that the REIT is profitable, paying dividends since establishment, at about ₦4.22 billion since 2015.

As at first half of 2020, the REIT had ₦31.89 billion in assets, spread across commercial property (45% as at H1-19), residential property (35% as at H1-19) and liquid assets (15% as at H1-19), among others.

In the books of UPDC, analysts stated that the REIT is held as an investment in associate and post unbundling; UPDC will reclassify the REIT as an “available for sale” asset with the REIT operating as a stand-alone business entity.

Meanwhile, the management has disclosed that it has obtained preliminary regulatory approvals for the unbundling.

The completion of the unbundling of the UPDC REIT is still subject to shareholders’ approval, as well as final regulatory approvals and court sanction.

“Based on our estimates, following the sale of controlling stake to UPDC and conclusion of the UPDC REIT unbundling, Custodian will own 31.37% of the UPDC REIT, while UACN will own 26.35%”, Chapel Hill said.

Restructuring initiatives is EPS accretive for UACN

Again, analysts forecast a marginal growth in turnover for financial year 2020 to ₦79.73 billion (up +0.7%), driven by the weak outturns in some business segments in the second quarter of 2020.

Meanwhile, in the first half of 2020, only the animal feeds business recorded growth (+0.7% to ₦23.48 billion), while the other segments declined.

Revenue from Paints segment dropped off by 19.1% year on year to ₦4.24 billion.

In the Packaged Foods segment, the company reported a declined 1.7% in sales to ₦8.19 billion and QSR plunged 12.3% to ₦625 million, as they were materially impacted by weak demand in the second quarter of 2020.

From a top line perspective, the Animal Feeds & Edible Oils businesses is classified as essential (and least impacted by the pandemic), which explains the positive expansion in the first half of 2020.

On the flipside, the QSR business, was non-essential (and most impacted by the weaker demand in Q2). However, the pandemic had a mixed impact on the Packaged Food, Logistics and Paints businesses.

For 2020, Chapel Hill Denham estimates that the revenue of the Animal Feeds & Edible Oil segment will expand by 3.6% year on year to ₦50.68 billion.

This is weaker than the 14.3% year on year growth delivered in financial year 2019.

“We are also projecting a 0.2% increase in the revenue of the Packaged Food business to ₦17.57 billion as against a 10.5% growth in 2020”, Chapel Hill noted.

For the Paints and QSR businesses, analyst expect top-line to decline by 9.4% year on year compare to +3.9% uptick in 2019 to ₦9.98 billion. .

Also, revenue from QSR is estimated to drop by 16.1% compare to +17.5% growth reported in 2019 to ₦1.26 billion.

Meanwhile, analysts recognised that foreign exchange devaluation will slow operating income down as earnings before interest, tax, depreciation and amortisation is expected to tail off along with profit after tax.

“We forecast 2020 EBITDA at ₦7.92 billion, representing a 2.3% decline from the ₦8.11 billion delivered in financial year 2019. This implies an EBITDA margin of 9.9% as against 10.2% in 2019’, Chapel Hill noted.

The management noted that the conglomerates’ EBITDA will be impacted by FX unavailability and Naira devaluation as well as operating expenses.

On FX devaluation, the dependence/exposure of certain business segments (particularly Paints) to imported chemicals and raw materials, imply higher cost of production in 2020 and pressure on margins.

For operating expenses, analysts explained that they expect increased personnel and marketing expenses to impact EBITDA.

The investment firm also projects a net finance income of ₦1.74 billion, finance income of ₦1.91 billion and finance expense of ₦176 million, on the back of the deleveraging of the group balance sheet.

As previously noted, UACN’s debt has declined to ₦2.98 billion in the first half 2020, from ₦24.17 billion in 2018.

Outstanding debts (on continued operations) are expected to mature in November and December 2020, indicating the elimination of all debts by the end of 2020.

The conglomerate’s pretax profit was projected to come at the year end at ₦7.21 billion, which represent a 3.3% decline while PAT is forecast at ₦5.05 billion, up 5.5% year on year.

Free Cash Flow to Equity (FCFE) expected to settle at deficit of ₦1.36bn in 2020; but could be buoyed to ₦12.39 billion in 2021 on receipt of cash from UPDC divestment.

Chapel Hill forecast 2020 net operating cash flow at ₦685 million as against deficit of ₦2.65 billion in 2019.

“We project net capex at ₦1.06 billion, due to covid-19 induced delays to expansion projects.  However, we expect net capex to be higher at ₦1.45 billion in 2021 on normalised production and factory activities.

Net debt proceeds is projected at deficit of ₦2.90 billion, driven by repayments of outstanding loans on continuing operations.

“Investors should be buying UACN, in our view”, analysts advised in the equity report.

Chapel Hill Denham upgraded its 12-month target price on UACN to ₦11.57 from ₦10.18, necessitated by the expected increase in FCFE on the completion of the sale of a 51% stake in UPDC.

The firm explained that the new target price implies a potential total return of 94.3%, comprises price return of 91.2% and dividend return of 3.0%.

Chapel Hill Denham Advised Investors to Buy UACN Shares for 94% Upside