UACN: Analysts Rate Stock Hold After Q2 Earnings
Equity analysts have advised investors to keep UAC of Nigeria (UACN Plc) stock on hold after the company reported an improved earnings outturn in the second quarter of 2021. Investors valued UACN at N28.957 billion on 2.881 billion outstanding shares.
The share price closed at N10.05 Friday, gained N0.05 after staying flat for 7 trading sessions while analysts at Meristem Securities Limited set a 12-month target price at N10.90, translating to less than 9% upside potential.
In the second quarter of 2021, the group delivered solid earnings growth as expanded sales resulted in an improved bottom line. The company’s stellar outturn was attributed to low base effects in the financial year 2020.
Due to the pandemic-induced lockdown, the consumers’ goods conglomerate had dropped. However, increased economic activities raised revenue 43.27% year on year, from N17.08 billion in the second quarter of 2020 to N24.48 billion exactly a year after.
In its equity report, Meristem Securities said this represents its highest Q2 performance on record, noted that increased product price and strong domestic demand lifted the company’s performance.
Particularly, analysts noted price increase in the Animal Feed and Packaged food segment and a 62.03% revenue jump in QSR business contributed significantly to the group’s impressive outing.
“We recognize that the revenue performance in the quarter was flattered by the 2020 low base”, analysts said, noting that in comparison to a 4-year second-quarter average, Q2:2021 the growth was only better by 28.84%.
Cumulatively, the company’s first half of 2021 revenue grew by 26.93% to N46.50 billion from N36.63 billion in the first half of 2020.
Equity analysts’ review that on a segment basis, the Animal Feed and Other Edibles segment, which accounts for about 60% of the group’s revenue jumped 13.39%, owing to improved sales in the poultry and fish feed.
The company’s financials showed that revenue from the Poultry segment expanded 12% year on year in the period in addition to a 53% increase in sales from the fish feed segment. Also, the Paint segment recorded a strong rebound with a 59.40% growth in revenue.
In the same period, analysts noted the packaged food segment recorded a 45.5% revenue growth, driven basically by improved volumes stemming from additional spring water capacity to meet teeming demand, enhanced distribution, and market capture through the introduction of new snack variants (Gala spicy and Gala Classic).
Meristem said the performance of the Quick Service Restaurant (QSR) segment however stood out with the highest topline expansion of 62.03% year on year in the first half of 2021, from N625 million to N1.01 billion at the end of the first half of 2021.
It is noted that revenue growth from the Restaurant segment was supported by higher royalties from franchises, as well as increased volume sales from the company’s corporate store and central kitchen.
“We are optimistic about revenue generation going forward, given that the company is on course to solidify its footing in the industry with its restructuring initiative. This is expected to drive an expansion of its QSR business footprint, introduce new spring water capacity and rebrand the packaged food business”, analysts noted.
For the rest of the year, analysts at Meristem Securities indicate an expectation of improved consumer demand to support performance across its segment. Hence, projected a 10.06% growth in sales to N89.54 billion in the financial year 2021 from N84.61 billion in 2020.
According to Meristem Securities, topline expansion recorded in the period gave the company’s earnings a facelift amidst rising costs. In the period, the company’s costs to sales ratio inched higher to 82.10% compared to 80.91% in the first half of the financial year 2020.
This was mainly due to higher recognition of inventory and work in progress costs, up 33.08%, which typically represents the highest constituent of production costs.
Similarly, analysts noted the company’s operating expenses rose by 8.35%, led by the increase in Administrative and Selling expenses – a reflection of the company’s effort to drive sales further.
In the review, Meristem said that the increase in revenue and other income – partly attributable to gain on sale of land by CAP Plc – was however sufficient to offset the increase in operating expenses, driving operating margin slightly higher to 3.66% in H1:2021 from 2.26% in the corresponding period.
Analysts also noted there was a notable increase of 83.92% in finance cost to N674.69 million from N366.85 million in H1:2020 representing an effective interest rate of 3.90% as against 8.65% in H1:2020.
“The higher finance cost reflects additional short term debt financing for working capital requirements across its subsidiaries”.
Nonetheless, profit before tax and profit after tax expanded by 25.35% from N1.03 billion to N1.30 billion and 257.65% from N213 million to N764 million in H1:2021 respectively. This translated into a net margin of 1.64% from 0.58% in H1:2020.
“Although we expect the inflationary environment to keep costs elevated, we are optimistic on earnings performance”, analysts added.
For the financial year 2021, Meristem Securities projected a 19.73% growth in profit after tax to N4.14 billion. The investment firm noted that the company’s profitability reflects on shareholders return in the period.
“We note that the company’s annualized return on equity improved to 6.94% from 5.63% in 2020, primarily driven by improved net margin and asset turnover”.
Read Also: UACN Earnings Performance Still Unimpressive despite New Moves
The annualised net margin had printed at 4.25% in 2020 with asset turnover at 0.88x, but there was an improvement in the first half when net margin expanded to 4.39% with 0.94x asset turnover respectively.
Meristem Securities forecasted UACN earnings per share for 2021 will print at N1.44 with a target price-earnings ratio of 7.58x, resulting to a target price of N10.90.
