Earnings Review H1: Uacn Properties Bogged Down By Costs

Investments in Real Estate are always thought to be safe bets considering that they mostly appreciate in value over time. This helps mitigate against inflation whilst ensuring that a steady revenue stream is guaranteed. With a housing deficit of about 17million in Nigeria UPDC, the leading real estate firm in Nigeria is one of such companies that you’d expect to be cashing in on these opportunities.

Revenue

The company released its H1 2012 financial statements with revenues growing by 47% to N5.4b when compared to the same period last year. Cost of sales however went up by a whopping 78% to N3.3b dwarfing the increase in turnover. This resulted in Gross Profit Margins dropping 22% to 38%. For a real estate company, higher cost of sales may be attributed to high cost of construction, higher land prices amongst others.

Expenses

Admin Expenses was N848m in line with the N853m obtained in the same period last year.  With relatively stable admin expenses the company was able to post an operational profit of N1.2b, 18% higher than the N1.1b obtained in the first half of 2011. However, this fell below expectations as operational margin dipped to 23% for the period compared to 30.8% in the first half of 2011. The dip in operational margin is as a result of the high increase in cost of sales thus reducing the company’s competitiveness.

Finance Cost however, dropped 9% to N562m for the first 6months of 2012. Interest Expense as a percentage of Operating Profit also dropped to 45% from 54.8% in the same period last year. Though, still nearly double what I think it should be, this 17.6% drop is a welcome trend for the business to remain profitable and competitive.

Profit After Tax

Profit after tax rose 38% to N617m in the first half of 2012 when compared to the same period last year. It however was not strong enough relative to revenue as profit margins was 11.4% down from 12% in the first half of 2011. All this boils down to the cost of sales as the impact of its increase cascades down to the bottom line. Return on Equity was a paltry 2% just higher than the 1.5% posted last year.

Bottom Line

UPDC is a brick and mortar company and as such its business model is quite easy to comprehend. They own choice properties in many high brow areas in Lagos and in Abuja and also own the Festac 77 Hotel. But their H1 financials rather than show strength in its business model is bogged down by its inherent weaknesses. The soft real estate market is still taking its toll on the prices and companies have now learnt cut down on amount they pay for rent.

As expected the company’s share price has nose dived over the last one year dropping over 100% in value. The  Company’s result is far from impressive in the first half of the year and at this rate may continue to see share price well below N10. At a price earnings ratio of 6x the stock may appear cheap but it is always wise to look at the bottom line and the ability of the company to return good value to shareholders in terms of returns. Nothing up there indicates such for now. For me its a red ink.