What UACN decision to un-bundle UPDC means for its shareholders

How do you explain going from revenue of N11.7 billion per annum to N2.3 billion in 5 years? In fact, try explaining going from a profit of N3.5 billion to an astonishing loss of N10.9 billion. This, unfortunately, has been the story of UPDC Plc, a property development company listed on the Nigerian Stock Exchange.

Between December 2015 and June 2019, this company has lost over N20 billion in shareholders’ funds following years of accumulative losses. Last year alone, it posted a loss after tax of about N10.9 billion about half of its total accumulated losses till date. Add to about N11.4 billion in external interest-bearing loans and another N15.1 billion in trade and tax payables you realize this is a real estate company on its way to financial insolvency.

Thus, during the week UACN Plc and its subsidiary UPDC Plc issued separate press releases outlining a set of actions that they expect will rescue this very dire situation. According to the press release, a combined initiative of recapitalization and restructuring will be deployed to help salvage the situation. Here is a summary;

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UACN will unbundle its investments in UPDC by issuing its shares in the company to its shareholders on a pari passu basis.
This means, if you are a shareholder in UACN, you will now hold direct shares in UPDC. UACN currently owns 64% shares in UPDC
UPDC will also unbundle its 60% ownership in UPDC REITs, its subsidiary also giving its own shareholders direct ownership into UPDC REITs.
At the end of this process shareholders in UACN will own shares directly in UACN, UPDC and UPDC REITs.
UPDC will also seek to raise about N15.9 billion via a rights issue, from its new shareholders, which it will use to pay down loans.

What this means for shareholders: The UACN group has for years undergone various restructuring as they attempt to reposition for profitability. To understand the possible implication of these set of unbundling of the group, one will have to look at each company on its own merit.

UACN the main company has about 4 main segments. In April 2018, the company announced new shareholders, Blakeney GP 111 Ltd, Stanbic Nominees Limited, and Themis Capital Management now had shares above 5% each in the company. This followed a N15 billion rights issue sold by the company in 2017.
UACN has about 6 revenue segments, Animal Feeds, Paints, Packaged Foods, QSR, Logistics, Real Estate, and others.
All its segments are profitable except for its real estate segment which reported a loss before tax of N13.2 billion. This helped dragged the company into an after-tax loss of N9.5 billion in 2018. Without the lossmaking Real Estate business, UACN would have posted a profit of about N3 billion.
UACN share price has also plummeted from N56.9 to about N4.5 in the last 5 years while dividend per share as gone from N1.75 in 2014 t0 N64kobo last.
Surely, shareholders have not gained anything from holding on to their loss-making real estate business.

The Real Estate Company, UPDC has performed even worse over the last five years explaining why the company’s management and board of directors have decided to unbundle it.

UPDC has even fared worse. Its share price has gone from about N15 five years ago to 82 kobo, one of the worst performances on the stock exchange.
Despite several restructuring, sell-offs, and spin-offs the company’s fortunes have failed to turn for the better.
Billions spent on real estate properties with poor market values and rental yields have failed to deliver anything positive for shareholders.
The company even struggled to manage a hotel which we believe it overpaid for. Last year, it agreed to sell Golden Tulip among other properties yet that did not stop it from posting record N10.9 billion loss after tax.
Ironically the company has sold off its profit-making hospitality business leaving its loss-making property sales and development for shareholders to own. The company lost N9.2 billion last year alone.
The company explains this unbundling will help shareholders benefit from the gains of restructuring. Of course, they will have to stump about N15.9 billion in new equity. Yet another effort that could end up in futility for the company.
The best decision will probably be allowing shareholders to own a stake directly in UPDC REITs.

UPDC REITs remains the group’s business with a little bit of managerial sanity and profitability. In fact, the Real Estate only company has been paying dividends as one would expect from a REIT. However, it is not without its own challenges.

Its share price has since halved from N10 to about N5.4 since its listing about 5 years ago.
Despite this, it has continued to post profits from rent from its properties and low operating cost.
Ironically most of its properties were spin-offs from UPDC Properties. When the REIT was set up, they promised a rental yield of about 7%-9%. We did warn back then that wasn’t attractive.
Rental yields for most of the properties it owns is between 5-8%.
Investors in UPDC REITs can, however, expect to get dividend yields as high as 10% based on the current share price. Those who bought at N10 will only enjoy a 5% yield.

Bottom Line: If there is one reason why some analysts detest Holdco’s then this is one. This has been one of the worst conglomerates on the stock exchange. Thus, unbundling is a welcome development. Even though we do not expect it to provide much shareholder value in the short term it at least places all three companies on the path to value creation.

The management of these companies should also consider quitting once the restructuring is concluded. It had to take Themis Capital induced management restructuring to turn things around. Folasope Aiyesimoju the company CEO has made a bold move with this unbundling. This could well be the start of many positive things to come.

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