UACN: Decent Revenue Recovery Stokes Earnings in Q3-2020
United African Company of Nigeria, UACN, reported decent demand recovery that stokes the conglomerates earnings in the third quarter of 2020.
Amidst restructuring program, it appears that the coast is getting as UACN return to profitability after it had sustained loss in the second quarter.
While the company’s earnings came stronger in the third quarter, CardinalStone said pass-through from the second-quarter loss resulted in a 67.0% plunge in profits from continuing operations to ₦1.5 billion over the first nine months of the year.
The company’s revenue grew by 10.5% year on year to ₦21.2 billion, which was aided by growths across all operating segments.
UACN’s reported 10% increase in revenue from its animal Feeds & Other Edibles.
Revenue from Paints expanded 18%; packaged Food and Beverages moved up 8%; and income from Quick Service Restaurants rose 16%.
In its equity note, CardinalStone stated that UACN noted the positive impacts of volume growths in fish feed and cereals as well as price increases in a few categories on Animal Feeds & Other Edibles in the quarter.
Analysts said other notable growth drivers in the quarter included the lifting of COVID-19 restrictions (Paints) and the launch of company-owned restaurants (QSR)
According to CardinalStone, knock-on effect of price increases and a focus on higher-margin categories in the Animal Feeds & Other Edibles segment drove gross margin 1.7ppts higher to 20.8%.
These higher-margin categories included oils and cereals such as cornflakes.
However, operating profit margin declined by 2.5ppts to 5.6% on the impact of the high base effect from Q3-2019 that was stoked by one-off entries.
Specifically, analysts said the previous year’s numbers were flattered by the ₦631 million proceed from the sale of non-core real estate assets and write-back of a statute-barred unclaimed dividend of ₦206.3 million.
Excluding these one-off entries, CardinalStone estimated that UACN’s operating profit margin would have been higher by 1.9ppts.
Overall, the company’s unaudited result showed that profit after tax from continuing operations rose by 8.2% year on year to ₦1.2 billion.
However, CardinalStone observed that there was a sum of ₦493 million loss from discontinued operations from UPDC (compare to ₦14.0 billion loss in the corresponding period of 2019).
This loss from discontinued operations moderated total Q3’20 profit to ₦743 million.
“Despite the Q3-2020 recovery and potential festive-induced demand in the ongoing quarter, UACN looks on course to underperform our full-year profit forecast of ₦3.3 billion going by the contributions of the final quarter numbers in recent years”, CardinalStone explained.
Nonetheless, analysts stated that the company’s increasing net cash position is supportive from a valuation standpoint.
Meanwhile, analysts said UACN’s cash position is also likely to be improved by the second tranche flows of the UPDC/Custodian deal.
The conglomerate’s cost of sales as adjusted for depreciation rose slightly ahead of revenue, thereby put pressure on margin.
Cost of sales specifically jerked up 2.3% year on year to ₦45.1 billion in 9M-2020 from ₦44.1 billion in the comparable period in 2019.
However, on quarter on quarter basis, the company’s cost of sales growth moved slower than revenue growth, up 20.8% year on year to ₦16.8 billion in Q3-2020.
CSL Stockbrokers noted in its equity note that the company raised prices on some of its products in Q3 in a bid to pass on some of the increase in raw material costs to consumers.
“Thus, while we note the overall cost pressures on margins in 9M 2020, we expect margins to improve by year end given the impact of the price increase”, CSL Stockbrokers explained.
Down the line, gross profit declined marginally by 0.2% year on year to ₦12.7 billion in 9M- 2020.
But on a quarter on quarter basis, UACN gross profit grew 37.4% year on year to ₦4.4 billion in 9M-2020.
The analysis shows that on year on year, gross margin contracted by 0.3 percentage point to 22.0% in 9M 2020 but recovered 2 percentage points to 20.8% in Q3-2020.
Also, operating expenses as adjusted for depreciation expanded by18.5% year on year to ₦9.2 billion in 9M-2020 from ₦7.8 billion in 9M 2019.
On a quarter on quarter basis, operating expenses also grew 8.9% to ₦3.3 billion in Q3-2020.
Analysts said the growth in operating expenses was driven by increase in selling and distribution expenses with record level of 6.0% year on year increase to ₦4.3 billion.
This was again supported by a 32% year on year increase in administrative expenses to ₦4.9 billion.
The breakdown of the result showed that the growth in administrative expenses was largely driven by increase in personnel expenses.
This was as a result of the results of the Company’s focus at improving the quality of management personnel.
As a result, earnings before interest tax depreciation and amortisation (EBITDA) plunged 36.0% year on year to ₦4.0 billion in 9M-2020 from ₦6.2 billion in 9M-2019.
On a quarter on quarter basis, EBITDA surged 241.8% year on year to ₦1.2 billion in Q3-2020 from ₦0.3 billion in Q2 2020.
Depreciation & Amortisation was up 18.2% to ₦1.9 billion in 9M-2020, negatively impacting operating profit which declined 55.6% to ₦2.0 billion in 9M 2020 from ₦4.5 billion in 9M-2019.
Following the lower net finance income, UACN recorded a 58.8% year on year decline in pre-tax profit to ₦2.5 billion in 9M-2020 from ₦6.0 billion in 9M 2019.
Profit from continuing operations also dipped 67% to ₦1.5 billion in 9M-2020 following additional pressure from higher Effective tax rate.
However, the company reported profit from discontinued operations of ₦0.5bn in 9M-2020 compared with a Loss of ₦14.7 billion in 9M-2019.
As a result, Profit for the year came to ₦1.9 billion in 9M-2020 compared with a net loss of ₦10.3 billion in 9M-2019 as earnings per share settled at ₦0.47.
On stock price valuation, analysts at CardinalStone projected ₦8.26 target price for UACN, but a rather bearish analysts placed ₦6.90 on the conglomerate.
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UACN: Decent Revenue Recovery Stokes Earnings in Q3-2020
