UACN Nigeria Plc published its 2019 full-year results over the weekend reporting a pre-tax profit of N7.45 billion up from N6 billion a year earlier. The company’s result was published on the website of the Nigerian Stock Exchange.
Despite a better performance, the company still went on to post N9.25 billion in loss after tax compounding woes for shareholders after it reported a N9.49 billion loss a year earlier. However, a closer look at the results reveals the major reason for the loss was a N14.6 billion write down the company suffered during the year. UACN also reported a write-down of N13.7 billion in 2018.
Why Write Downs: An excerpt from the company’s audit remarks explained write-down was due to a combined net-loss from its holdings in the subsidiaries UPDC, MDS Logistics, and UNICO. However, all the losses were from its holding in UPDC pls where it took a write-down of N14.9 billion (UNICO & MDS Logistics combined profit was N395,779). The breakdown of N14.9 billion includes about N2.6 billion in operating losses from operations and another N12.6 billion in “impairment of assets of disposal group held for sale and discontinued operations.”
The auditors to the company Ernst n Young explained the N12.6 billion loss, classifying it as a key audit matter. The auditors explained that the company’s plan to unbundle its interest in UPDC and subsequently its ultimate interest in UPDC REITs “led to a huge decline in the market/fair value of the associate quoted shares from N5.4 per unit as at 2 September 2019 to N4.25 per unit as at December 2019” resulting in a diminution of value.
UPDC had listed the REIT at N10 per share in July 2013 but has lost significant value since then even though UPDC had continued to carry it in their books at cost. But with the company announcing officially that it plans to spin off the asset, it now has to write-down the losses. According to EY, “the diminution in the unit price has resulted in an erosion of the unitholders’ value” thus as impairment loss of N12.64 billion was recognized by the group.
Write down on Victoria Mall Plaza: The auditors also reported that UACN had to take a write-down on its interest in the Victoria Mall Plaza which was still under construction. According to the auditors, a sum of N1.3 billion was written off to reflect the selling price it is currently getting for the asset.
“During the year, the Company’s inventory (assets under construction) in respect of Victoria Mall Plaza (VMP) 3A and Victoria Mall Plaza (VMP) 3B was written down by N1.3 billion (2018: N0.594 billion) to its net realizable value based on the expected selling price and other incidental costs to sell” EY explained.
This means the company had been carrying a price of N4.27 billion for the asset which is what its valuers valued it for however no one is willing to pay that price. Thus in compliance with IFRS, the auditors required that they value the property at the N3 billion asking price.
What this means: This marks a new beginning for UACN following years of declining profits and two years of back to back losses. The losses are mostly due to its investment in UPDC, its property development arm operating in a struggling market. Nigeria’s real estate sector recorded a negative real GDP growth rate of 2.37% in 2019 and has been in recession since about 2016.
By spinning off the unprofitable entity, the conglomerate can now focus on its core businesses of Animal Feeds, Paints, Packaged Food and QSR business. In 2019, the company earned N48.9 billion, N11 billion and N17 billion in revenues from its Animal Feeds, Paint and Packaged Foods business. This has always been the core of UAC over the years and should place the company on the part to profitability.
Themis Capital Management, the core investor at UAC of Nigeria Plc (UACN) increased its investment in the conglomerate in February. The acquisition of the additional shares adds substantially to its investment in the company, as it is already the single largest investor with about 8.08% shareholding as of December 31, 2018. Themis paid N10 per share for the additional shares. The company share price closed at N7.50 on Friday and is down 18% YTD.