Culled—Proshare

May 14, 2020

By FBNQuest Research

Marked decreases to earnings forecasts and price target

We downgrade our rating for UACN to Neutral and cut our price target by -27% to N10.0. Our earnings outlook over the near-to-medium term has deteriorated sharply given that the company’s PBT driving segments – Paints (c.38% of PBT) and Packaged foods (c.30% of PBT) are likely to be hardest hit by the ongoing COVID-19 crisis. Specifically, we highlight that i) products from these segments are more discretionary, making them more vulnerable to the ensuing slump in demand; and ii) import requirements for paints are as high as 80% of CoGS while the packaged foods business has an indirect fx exposure of around 50%. We therefore see weaker exchange rates eroding profits.

The other weak spot for the overall group is the tough operating environment faced by the Animal Feeds & Other Edibles business. Indeed, Q1 2020 results show that PBT for the segment plunged by -91% y/y to N11m and missed our forecast by -63%. Although management has made clear that, going forward, it will pass on fx inflation to animal feed prices, we see this move being constrained by strong competitive headwinds in this space. Taking all these into consideration, our EPS forecast for 2020E has been adjusted lower by -33%, driven by -27% and -12% cuts in paints and packaged foods. This implies an average cut of around -26% over the 2020-22E period.

We recognize that the reclassification of MDS Logistics as an associate – following the sale of UACN’s 8% stake – contributed to a group PBT decline of -31% in Q1. That said, we expect 2020E bottom line to be supported by a N500m gain recognized in Q1 from the sale. Year-to-date, UACN shares are down -19%, underperforming the broad market index by -7%. Our new price target stems from lower inputs from our sum-of-the-parts valuation and implies a potential upside of 43% from current levels. We however expect y/y deterioration in earnings to fuel bearish sentiments in the stock, hence the downgrade.

Q1 2020 PBT down -31% y/y

Sales declined by -3% y/y to N19.5bn largely due to the exclusion of MDS from Q1 2020 numbers, while gross margin narrowed by -33bps y/y to 21.7%. PBT declined by -31% largely driven by a 14% increase in opex. Sequentially, sales increased by 5% q/q whereas gross margin contracted by -196bps. Compared with our forecasts, PBT missed by -12% because of a 12% positive surprise in opex.