Culled—-Proshare
1/11/2016/Vetiva Research
- Group 9M’16 revenue up 5% y/y
- Group reports 23% y/y rise in PAT
- Earnings beat estimates despite higher production costs
- Forecasts, TP revised upwards, BUY rating maintained
9M’16 revenue up 5% y/y supported by Food segment
UACN recorded an impressive 18% y/y revenue growth in the third quarter of 2016, with the topline outperforming Vetiva and Consensus estimates by 14% and 15% respectively. With this, 9 months revenue growth for the Conglomerate came to 5%, compared to -2% in H1’16.
With all other operating divisions recording revenue declines as at 9M’16, the Food & Beverages segment (up 11% y/y) singlehandedly buoyed the Group’s topline performance. We believe UACN will continue to ride on the strength of this segment through the difficult operating landscape, even as we expect the resilient Food subsector to outperform the broader Consumer Goods sector in the near term.
Looking at the Q3 performance stand alone, revenue was up 9% q/q, supported by a strong performance from its agro-allied subsidiary, Grand Cereals (in the Food & Beverages segment). We note that Grand Cereals had always been a bright spot for UACN, however following the bird flu disease outbreak in 2015, poultry volumes have been consistently suppressed.
The Paints segment (second largest contributor) also halted what would have been a third consecutive quarterly revenue decline as improvement in mainstream Portland Paints helped offset tepid volume performance in premium paints subsidiary, CAP. Nonetheless, we believe the Paints segment will continue to bear the brunt of waning activities in Nigeria’s construction sector, with the segment’s revenue down 10% y/y as at 9M’16.
Earnings buoyed by revenue growth, Other income
Surprisingly, UACN recorded gross margin moderation in Q3’16 to 21% (Q2’16: 22%). Though exposure to FX inputs remains minimal, management has stated that sustained FX unavailability and exchange rate volatility have led to cost increases, and in some cases, production disruptions.
Whilst operating expense and net finance expense lines remained relatively stable, there was a sharp rise in Other income line from ₦289 million in Q3’15 to ₦1.3 billion this quarter. According to management, this spike reflects FX translation gains from dollar denominated transactions by its MDS Logistics subsidiary.
Nonetheless, PAT margin in the quarter was little changed at 4%, resulting in ₦1.7 billion PAT (Vetiva: ₦1.3 billion). Overall, PAT for the nine-month period was up 23% y/y to ₦4.3 billion, outpacing Vetiva’s estimate by 10%.
Forecasts, TP revised upwards, BUY rating maintained
We have raised our forecasts to reflect this Q3’16 outperformance, possible volume boost from new product offerings (such as Gala mega and Supreme Cutie ice cream) and better volume performance across key operating divisions (particularly Foods & Beverages and Paints) in the festive season of the final quarter.
We have chosen to maintain a conservative stance on Grand Cereals’ performance amidst uncertainty concerning poultry feed volumes. Our FY’16 revenue growth forecast is raised to 8% y/y (Previous: 1%) and our FY’16 EPS forecast to ₦1.69 (Previous: ₦1.49). Our 12-month target price for UACN is revised upwards to ₦28.26 (Previous: ₦26.50).
