Culled—Proshare
August 20, 2020
by FBNQuest Research
Marked decreases to earnings and price target
We have cut our price target for UAC of Nigeria (UACN) by -26% to N7.4 on the back of a lower sum-of-the-parts valuation, following the Q2 earnings miss. The company recorded a pre-tax loss of -N264m, largely driven by weaker earnings from the major segments – Paints (-32% y/y) and Packaged foods (-99% y/y). The other businesses were loss making on account of the demand slump during the quarter.
Nevertheless, going forward, we expect subsequent quarterly financials to be underpinned by the following positives: i) between June and July, UACN was able to pass on rising raw material costs from its essential segments, and ii) the planned sale of 9.5 billion UPDC shares to Custodian Investment is expected to improve cash position by c.N7-8bn. However, given that fx pressures are likely to be sustained, growing earnings in paints and packaged foods will remain challenging. Indeed, products from these segments are more discretionary, making them more vulnerable to the weak growth environment.
In addition, 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 also see UACN absorbing some of the inflationary impact on animal feeds given competitive headwinds in this space. Taking all these into consideration, our EPS forecasts for 2020-22E have been adjusted down by an average of -31%, driven by marked cuts in paints and packaged foods earnings.
Year-to-date, UACN shares have shed -33%, underperforming the broad market index which is down -6%. Our new price target implies a potential upside of 27% from current levels. We however expect y/y deterioration in earnings to fuel bearish sentiments in the stock, hence we retain our Neutral rating.
Q2 loss driven by deterioration in key line items
Sales declined -15% y/y to N17.1bn while gross margin contracted by -342bps y/y to 16.2%. Adding to these negatives, opex increased by 21% y/y to -N3.3bn while net interest expense plunged -91% y/y to N38m. As such, a loss of -N264m was recorded.
On a sequential basis, sales declined -13% q/q while gross margin contracted by -551bps q/q. Opex increased by 3% q/q while net interest expense declined by -61% q/q. Relative to our forecasts, the Q2 loss compares with our PBT forecast of N1.3bn because of weaker-than-expected from sales, opex and net interest expense.
