UACN’s Troubled Outing in Q1 Prompts Earnings Downgrade

UACN’s Troubled Outing in Q1 Prompts Earnings Downgrade

United African Company of Nigeria (UACN) troubled business outing which resulted in a weaker earnings debut in the first quarter has prompted a downgrade. In an equity report, WSTC Securities downgraded the company’s earnings per share to 94 kobo from 98 kobo, having factor pressure in the paints segment into its estimates.

The company faced an input material conundrum for the Paint segment which resulted in increased input costs and then a slide in profit performance.   Of which, UACN’s paints segment appears very material to the group earnings performance due to size and contribution to the group.

In the first quarter of 2021, UACN reported a 13% year-on-year revenue growth from N19.55 billion in Q1-2020 to N22.02 billion. WSTC however said in an equity report that the Group’s revenue growth was majorly driven by the animal feeds & other edibles business, and the packaged foods & beverages segments.

UACN’s Troubled Outing in Q1 Prompts Earnings Downgrade
UACN’s Troubled Outing in Q1 Prompts Earnings Downgrade

In the period, the company’s operating profit was lifted marginally by 1% year on year from N1.13 billion to N1.14 billion, analysts noted.

However, profit before tax dipped by 38% when compare N1.67 billion reported in Q1 2020 to N1.03 billion delivered in Q1 2021.

At the end of the operating period, UACN’s net profit declined by 31% year on year from N1.15 billion in Q1-2020 to N791 million.

Sustained Growth in Animal Feeds Business Drive Topline Growth

WSTC Securities stated that the animal feeds & other edibles business segment recorded a 14 revenue growth from N11.70 billion in Q1-2020 to N13.39 billion in Q1-2021.

Rather than volume, the growth in this revenue line was attributed to price increases implemented across all categories, to offset rising input costs. In Q1-2021, analysts said the animal feeds & other edibles segment accounted for 60% of the Group’s total revenue which printed at N22.02 billion.

Packaged Foods

The breakdown of the group’s revenue indicated that sales from the packaged foods & beverages rose by 22% from N4.72 billion in Q1-2020 to N5.89 billion in Q1-2021.

Analysts said the revenue growth was driven by improved demand amid economic recovery from the Coronavirus pandemic. WSTC Securities added that the management’s efforts towards market penetration yielded results during the period, said the resulting increase in market share supported the topline growth in this segment.

Meanwhile, it was noted that packaged foods & beverages segment accounted for 25% of the Group’s total revenue in Q1-2021.

Continued Expansion Drive in the QSR Segment

Based on the strategic plans of the management to drive value in the quick-service restaurant business, revenue grew by 21% from N376 million to N454 million in Q1-2021.

Analysts at WSTC Securities said the Group’s strategy to drive growth and value in this segment include the opening of new corporate-owned stores and leveraging on its brand perception among consumers.

“New stores were opened during the quarter, thus spurring the double-digit topline growth”, analyst explained.

Macroeconomic Pressures Weigh on Paints Business

While UACN’s other segment reported growth, the paints business experienced pressure amidst rising competition. In the period, the company’s paints segment recorded an 11% revenue decline, from N2.70 billion it reported in Q1-2020 to N2.21 billion in Q1-2021, due to lower production activities during the quarter.

According to WSTC Securities, raw materials were scarce during the quarter, resulting from a significantly higher demand relative to supply as major economies rebounded from the Coronavirus pandemic.

The scarce raw materials also led to higher costs incurred on raw input, which led to a 49% decline in profit before tax in the Paints segment.

Profit Declines despite Cost Optimisation Efforts

UACN earnings was impacted by pressure in the paints segment in the Q1-2021, which resulted to a decline in overall profitability for the company.

In explaining why profit prints came lower, analysts spotted that growth in cost of sales outpaced revenue growth in the period, which then marked down gross profit position.

Cost of sales jumped 18% year on year -largely driven by costs incurred in the Paints business- relative to a 13% jump in total revenue.

UACN’s Troubled Outing in Q1 Prompts Earnings Downgrade

This led to a 3% decline in the Group’s gross profit from N4.23 billion to N4.01 billion in Q1-2021. In a way, reduced operating expenses limit the pressure on the bottom line. According to UACN financials, operating expenses declined by 5% from N3.19 billion in Q1-2020 to N3.04 billion in Q1-2021, driven by a 12% reduction in selling and distribution expenses.

WSTC Securities stated that the 5% decline in operating expense supported operating income, which grew by 1% from N1.13 billion to N1.14 billion.

However, it was noted that net finance income declined by 77% from N470 million in Q1-2020 to N109 million in Q1 2021. Analysts attributed the decline in net finance income was to lower average yields on financial assets, given the low-interest-rate environment in the fixed income market.

Consequent to the steep decline in net finance income, profit before tax declined by 38% from N1.67 billion to N1.03 billion in Q1-2021. WSTC Securities spotted that the effective tax rate in Q1-2021 was lower at 23% when compared with 31% in Q1-2020.

Hence, profit after tax slumped 31% year on year from N1.15 billion in Q1 2020 to N791 million in Q1-2021.

“We factored possible pressures in the Paints business, induced by higher cost of production. We expect the higher costs to normalise in the subsequent quarters”, WSTC stated.

However, analysts believe that a price increase might occur to offset higher costs of production. In the Animal Feeds segment, analysts at WSTC Securities said they expect to see sustained revenue growth and further expansion of market share.

“We slightly lower our earnings per share (EPS) forecast to N0.94 from N0.98. In arriving at our fair value estimate, we incorporated the expected benefits to accrue to UACN shareholders from the unbundling of UPDC REIT.

“Our revised fair value estimate stands at N9.62 from N9.90”, WSTC Securities explained.

UACN’s Troubled Outing in Q1 Prompts Earnings Downgrade

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