UACN: Virus-induced Operating Loss Insults Restructuring Efforts
The Coronavirus outbreak disrupted the United African Company of Nigeria’s (UACN) restructuring effort earlier seeing in the year, but analysts still maintain positive sentiment on its earnings outlook.
Despite the fact that UACN reported earnings knocked off, equity research analysts at WSTC Securities remain bullish, rated the stock a buy follows an estimated 36% upside potential.
In its equity research note, WSTC stated that the restructuring efforts of the Group in unlocking value in its respective subsidiaries commenced well at the early stages of the year.
A major restructuring highlight was an extensive overhaul in the management of its various subsidiaries.
“In our view, the restructuring appeared to be materialising, as reflected in the 5% year on year revenue growth in Q1’20 (exclusive of the revenue from the Logistics business in the computation of Q1’20 revenue, for a like-for-like comparison”, WSTC reckoned.
Analysts said UACN’s logistics business was reclassified due to the Group’s loss of control after selling a part of its equity stake to become a minority shareholder.
Connecting with the improved earnings profile, gross profit in Q1’20 also rose by 6%.
However, WSTC said the impact of higher operating expenses (due to new recruits at the senior management level) resulted in a decline in operating profit.
However, the securities investment firm said it expects the higher costs to normalise over time.
Overall, based on our assessment, WSTC said the market share of major products expanded amid a heightened competitive environment.
However, the Group experienced a disruption in operations due to COVID-19 related factors.
Other macroeconomic issues that had a negative impact on the Group’s operations include rising inflation and high exchange rate.
Notably, the lockdown directive and sit-at-home policy by the national government, in a bid to contain the virus spread, resulted in a decline in the Group’s sales.
The most hit business segment was the Paints segment which accounts for 10% to total revenue; having declined by 34% year on year in Q2’20.
The Packaged Foods business segment also declined by 15%, attributed to disruptions in supply chain (thus possibly resulting in a lower production capacity).
The physical distancing and restrictions to store openings resulted in a 34% decline in revenue from the Quick Service Restaurant business segment.
The Animal Feeds business segment performed relatively better as foreign exchange (FX) devaluation dampens growth in bottomline.
WSTC noted that cost margin in Q2’20 rose from 80% in Q2’19 to 83% in Q2’20.
The rise in cost margin is attributed to the impact of exchange rate devaluation on cost of imports.
Analysts explained that the business segment which had a significant exposure to the exchange rate was the Paints segment.
Consequent to the higher cost margin, gross profit dipped by 29% year on year, from ₦3.91 billion in Q2’19 to ₦2.76 billion n in Q2’20.
However, operating expense increased by 27% from ₦2.59 billion in Q2’19 to ₦3.28 billion in Q2’20.
The driver of the higher operating expense was personnel costs, due to the top-level recruitment made by the Group.
This resulted to a decline in operating income by 27% and an increase in operating expense by 27%, which reflected on profitability as the Group declared an operating loss of ₦300.29 million in Q2’20 from an operating profit of ₦1.33 billion in Q2’19.
Meanwhile, net finance cost declined by 52% from ₦274.38 million in Q2’19 to ₦132.41 million in Q2’20, however, it was not enough to influence the loss-making position of the Group in Q2’20.
Thereafter, profit after tax declined by 175% from a profit of ₦1.29 billion in Q2’19 to a loss of ₦933.32 million in Q2’20.
Recall that UACN notified the investing public of its decision to sell a 51% equity stake (out of its 93% ownership stake) in its Real Estate subsidiary – UPDC Plc.
WSTC noted that the Group previously planned to unbundle the Real Estate subsidiary due to its consistent loss-making position and erosion of value.
On the selloff, analysts explained that as at Q1’20, the transaction was awaiting necessary regulatory approval.
However, the Group opted for another strategy to rather sell a part of its equity stake to Custodian Investment Plc and retain a 43% equity position in the Real Estate business.
WSTC explained that the Group’s 93% equity stake in UPDC Plc was valued at ₦17 billion.
This represents a ₦14.4 billion (N0.83 per share) value for UPDC Plc, and additional units in UPDC REIT valued at ₦2.50 billion.
WSTC quoted UACN’s management as saying that the decision to do a 51% equity divestment rather than the previously planned unbundling exercise was down to the three main considerations.
The consideration includes that the Group crystalises cash proceeds, achieves its laid down strategic objectives and gets to receive units in the UPDC REIT which is profitable, cash generative and with potential future upside.
Given that the management decided to change the focus to retain a 43% stake in the struggling Real Estate business, the growth driver and the strategy to drive value are anchored on realisation of low-yielding assets and return cash to shareholders, analysts said.
The firm explained that other plans are to focus on disciplined investments with good risk-adjusted returns and grow the facilities management business.
According to International Financial Reporting Standards, the Real Estate business will be held as investment in associate in the Group’s books, and the share of profit or loss is expected to flow into the Group’s books.
WSTC said: “Given the current state of things and developments, we updated our model and assessed the potential value of the Group based on current developments.
“We initially incorporated the estimated accrued value to the Group’s shareholders with respect to the unbundling exercise.
“However, with the proposed transaction with Custodian Investment Plc, the unbundling (of UPDC Plc) exercise will no longer hold.
“We assessed the expected cash inflows from the transaction and how it strengthens the Group’s cash position.
“We also assessed the expected profits and cash inflows from the UPDC REIT that will accrue to the Group.
“In a separate development, we expect to see improvements in the Group’s other subsidiaries amid relaxation of the lockdown and sit-at-home directives.
“As the economy gradually reopens, we believe that demand levels will gradually pick up”, WSTC Securities stated.
However, analysts noted that a major downside risk is the illiquidity in the foreign exchange market.
A further deterioration in the foreign exchange market in the subsequent periods of the year will have a negative bearing on the Group’s performance, particularly its Paints business segment which has always been its major profit driver.
In the medium-to-long-term, WSTC said the firm posits that the growth driver will hinge on increased investments in technology, operating efficiency, and cost optimisation to grow margins.
Analysts noted that a major step taken towards that drive was reflected in the Group’s efforts in attracting a strong management team.
WSTC Securities estimates at a fair value of ₦6.71 for UACN stock. At current market price of ₦5.40, the total return (price return and dividend yield) of the stock stands at 36%.
UACN: Virus-induced Operating Loss Insults Restructuring Efforts