UACN was able to sustain growth in earnings in its recently released 9M 2019 results, however, a loss of N17.5 billion arising from discontinued operations masked the sustained improvement in its operating performance. We recall that UACN initially disclosed a restructuring exercise that will result in the unbundling of UACN’s interest in UPDC on one hand and UPDC’s interest in UPDC REIT.

As at H1 2019, UACN held a 64.2% stake in UPDC while UPDC controlled 61.5% of UPDC REIT. Accordingly, post-restructuring, there will be three separate entities namely; UACN, UPDC and UPDC REIT.  Based on our discussion with management, the 9M 2019 financial report reflects the accounting entries and adjustments based on the unbundling exercise.

UACN’s Revenue grew 13% y/y to N60.5 billion (annualised; N80.7bn), tracking our FY 2019 estimate of N80.9 billion. The growth in Revenue was on the back of higher Revenue from its Animal Feeds (+20% y/y accounting for 58% of group Revenue). We note that the Group Revenue excluded Revenue from the Real estate business (UPDC) following the classification of UPDC as discontinued operations.

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Pre-tax Profit grew strongly, up 31% y/y to N6.6 billion in 9M 2019 (annualised N8.7bn), well above our FY 2019 estimate of N7.4 billion. The better than expected growth in Pre-tax Profit was driven by the sustained recovery in the Animal feeds segment and a growth of 88% y/y in the Other Operating Income line, which was buoyed by Profit on sales of Investment property (N631 million in 9M 2019 vs 12m in 9M 2018).

On a quarterly basis, Revenue declined marginally, down 2% q/q to N20.4 billion, driven largely by weaker Revenue from Animal Feeds (down 2% q/q). Pre-tax Profit, however, grew 11% q/q to N2.1 billion in Q3 2019, solely due to the 6.8 times increase in the Other Operating income line (N1 billion in Q3 vs N134million in Q2).

EBITDA grew 18% y/y but declined 39% q/q to N4.9bn and N1.1 billion respectively. The y/y growth in EBITDA was buoyed by the growth in Revenue, which offset the rise in Cost of Sales (+12% y/y) and Operating Expenses (+11% y/y). The sharp decline in Q3 EBITDA (down 39%) was due to the weak Revenue (down 2% q/q) and an 18% q/q increase in Operating Expenses. Consequently, EBITDA margin strengthened to 8.2% in 9M 2019 (9M 2018; 7.8%) but moderated to 5.6% in Q3 2019 (Q2 2019; 9.0%).

We observed the marked decline in gross debt of the Group (down 80% YTD to N4.8bn in 9M 2019 from N24.2bn in FY 2018)- This was driven by the exclusion of debts belonging to UPDC in the Group financials following the de-recognition of UPDC in Q3. Consequently, the Group reported a Finance Cost of N292 million in 9M 2019 (Post-derecognition of UPDC) compared to N1.8bn in H1 2019 (Pre-derecognition of UPDC).

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Pre-tax profit grew 31% y/y and 11% q/q to N6.6 billion and N2.1 billion respectively. Following the classification of UPDC as Discontinued Operations, the Group had to consolidate a loss of N17.5 billion being loss after tax on discontinued operations. Accordingly, this wiped off the Profit after tax of N4.7 billion from continuing operations, leading to a Net loss of N12.7 billion in 9M 2019.

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We recall that UPDC REIT was listed in June 2013 on the Nigerian Stock Exchange (NSE) at a unit price of N10.00 with outstanding shares of 2.67 billion. As at 31 October 2019, the market value had declined to N4.90, indicating a N13.61 billion decline in market value since listing. Upon unbundling, UPDC will have to book a mark to market loss, being the difference between the carrying value of the investment (classified as an Investment in Associate) and the market value. As at H1 2019, the carrying value of UPDC REIT in the books of UPDC stood at N20.6 billion. Based on the financial report published by UACN, UPDC took a mark to market loss of N12.6 billion which was eventually consolidated as part of the loss from discontinued operations.

We have a target price of N10.3/s for UACN with a BUY recommendation (current price; N6.50). Our estimates are under review.

______________________________________________________________________

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

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