Culled—Proshare

April 19, 2017/FBNQuest Research

8% increase to our price target; maintaining Outperform rating

UAC of Nigeria’s (UACN) Q4 2016 sales grew 44% y/y to N26.9bn. The foods and beverages businesses were up 45% y/y, primarily on the back of a positive surprise in the Grand Cereals sales.

The latter’s topline, up 59% y/y to N14.3bn, accounted for 66% of food and beverage sales. This is the strongest quarter on record for this subsidiary.

According to management, UACN’s animal feeds businesses benefitted from a concentrated market as fx shortages led to fewer competitors and increased patronage from local brewers which sought to increase local inputs in their production mix.

Although UACN’s real estate subsidiary (UPDC) sales were also strong, a second consecutive year of impairments led to a pre-tax loss of –N1.8bn.

Management notes reveal that impairments were related to intercompany receivables (N748m) and losses on ongoing projects (N1.7bn). Excluding UPDC’s numbers, UACN’s performance was significantly better.

Going forward, we have raised our conglomerate discount to 20% from 10% given the continuous negative surprises in the real estate business, a difficult near term outlook for the segment due to a weak macroeconomic environment and its resultant impact on the group’s overall profitability.

On a brighter note, we forecast sales and EPS growth of 7% y/y to N90bn and 23% y/y to N2.41 respectively in 2017E, boosted by double-digit growth in UACN’s food & beverage segment and a recovery in paints sales.

Management believes sales of c.N100bn in 2017E is achievable. We have raised our EPS estimates for the 2017-18E period by 36% on average.

Our new price target of N32.7 implies a potential upside of +121%. At current levels, UACN shares are trading on a 2017E P/E multiple of 6.1x for an average EPS growth of 7% in 2018E. Ytd, UACN shares have shed –12.0% compared with the broad market performance of -6.2%. We retain our Outperform rating.

Q4 2016 PBT down -24% y/y to N1.5bn

In Q4 2016, while sales of N26.9bn grew 44% y/y, PBT declined -47% y/y to N1.5bn. A gross margin contraction of -657bps y/y to 18% offset any benefits coming through from the strong topline growth and an opex decline of -8%.

PAT declined by a smaller margin due to a relatively low tax rate of 10% vs. 24% in the corresponding period of 2015. Compared with our estimates, PBT came in 24% behind our N1.9bn forecast.

Sales came in around 53% higher than our N17.6bn estimate; however, this was offset by negative surprises on the cogs, opex and share of profit from associates lines.

In particular, sales from UACN’s food and beverage business were quite strong, up 45% y/y to N21.7bn, and ahead of our estimate by 42%.