Culled—Proshare

24/4/2019/ FBNQuest Research

Slight cut to 2019-21E EPS forecasts

Following UACN’s earnings conference call, we have made slight downward adjustments to our 2019-21E forecasts, despite the new management’s assurance that things are turning around for the better. Although large impairments taken on real estate investments in 2018 – which drove the pre-tax loss of -N5.5bn – are expected to be non-recurring over the forecast period, we see the biggest challenge coming from the animal nutrition and other edible businesses (Grand Cereal and Livestock Feeds; c.54% of group sales). Indeed, group sales which declined by -12% y/y were weighed down by weaker sales in Grand Cereal (-28% y/y) and Livestock Feeds (-23% y/y).

Looking ahead, these businesses are unlikely to show a healthy pick-up in the near term, given sustained competition from global food company Olam International. Our forecasts already reflect a tough competitive environment, though we have made a slight cut of -60bps on average to our 2019-21E EPS estimates.

However, on the back of lower sum-of-the-parts valuation assumptions, our new price target of N10.2 is around -19% lower than previous. Year-to-date, UACN’s shares have shed -28.7%, underperforming the broad index by 24.3%. Although our new price target implies a potential upside of 45% from current levels, we retain our Neutral rating on the shares, considering the overall bearish picture in the near-to-medium term. 

-N6bn in pretax loss made in Q4

Q4 sales for the group plummeted -48% y/y to N23.0bn, while pre-tax and after-tax losses of –N6.0bn and –N9.8bn were incurred for the quarter. A gross margin contraction of -39bps y/y to 16.9% and other operating net losses of –N8.9bn (Q4 2017: -N955.9m) also contributed to the squeeze in profitability during the quarter. These negatives completely offset the gain from lower net finance costs of N347m (down -86% y/y).

Sequentially, sales increased by 22% q/q whereas Q4 pre-tax loss compares with -N1.6bn for Q3. Compared with our forecasts, sales beat by 10%, but PBT and PAT were significantly lower than our forecasts of N260m and N176m respectively.