Last week, UAC of Nigeria Plc (UACN) released its unaudited Q2 16 result wherein PBT bucked the negative trend in last five quarters, rising 12.1% YoY to N2.2 billion.
- Cost cutting measures drive margin expansion: In response to flagging turnover growth, UACN responded with increased sensitivity to financial and operating costs. Notably, management, earlier in the year, took advantage of low interest rate by issuing a
N16.8 billion (59% of total borrowings) commercial paper at 11%, much lower than borrowing rates (13%-16%) UACN obtained on bank loans. In addition, UACN maintained a tight lid on operating costs (-5.1% YoY toN2.7 billion) by cutting back on selling and distribution expenses (-17.9% YoY toN843 million) which helped drive a recovery in PBT over Q2 16. - Price increases help offset inflationary pressures: Extending the negative trend in last five quarters, Q2 16 revenue contracted 4.2% YoY to
N15.0 billion. Top-line weakness reflects pressures in the real estate and paints businesses which continue to be impacted by weak consumer spending and soft construction activities. Effect of the foregoing more than offset improved turnover at the logistics and food businesses. - Improved top-line growth and cost containment buoy earnings outlook: Going forward, constrained consumer spending on weaker real incomes and subdued construction activities should continue to drive sales declines for UACN’s real estate and paint businesses. Nonetheless, increased pricing at foods & logistics divisions and containment of bird flu pandemic should drive upside in revenues in the seasonally stronger H2.
- On costs, the weak macro landscape should induce greater incentive on cost optimization with further cuts on S&D expenditure. Thus, largely reflecting improved top-line growth and UACN’s cost control measures we adjust our FY 16E PAT estimate 13% higher to
N5.7 billion. - UACN trades at a current P/E of 22.63x vs. 15.69x for its Bloomberg Middle East & Africa peers with last trading price of
N20.73 at a 9% discount to our FVE (N22.48). Thistranslates to a NEUTRAL rating on the stock. - UACN is hosting a conference call on Tuesday, August 2nd at 3pm Lagos time.
Source: ARM Research
