UAC of Nigeria Plc released its Q1 2020 unaudited result on Friday. We note that UPDC (the real estate subsidiary of the Group) was re-classified as “held for distribution to owners” in UAC’s statement of financial position. UPDC was also re-classified as “a discontinued operation” in the Group’s statement of profit or loss.
Following UACN’s divestment of 8% of its stake in MDS Logistics to Imperial Capital Limited (ICL), which effectively resulted in loss of control given the current 43% equity stake, the logistics business was accounted for as an “investment in associate” in the Group’s financials in Q1 2020.
The company reported a profit of N717 million in Q1 2020 (vs the loss of N969 million in Q1 2019 from discontinued operations UPDC). Management noted that this was due to a N3.1 billion fair value gain on recognition of MDS as an investment in associate which offset a N2.6 billion loss from UPDC; being the loss incurred by UPDC on account of impairment of its investment in UPDC REIT).
The Group’s revenue declined by 3% y/y to N19.5 billion. We highlight that this was largely driven by the re-classification of MDS as an associate in Q1 2020, which led to the exclusion of revenue from the logistics business (MDS) in Group’s revenue in Q1 2020 compared to N1.2 billion recognised in Q1 2019.
Excluding the revenue for MDS in Q1 2019, Group’s revenue increased 3% y/y, driven by growth in the packaged food & beverages segment (up 11% y/y), and animal feeds segment (up 3% y/y). Management noted that the growth in the packaged food & beverages segment was supported by improved product availability, while the animal feeds segment benefitted from volume growth in poultry feeds.
EBITDA declined significantly, down 21% y/y to N1.8 billion while EBITDA margin weakened by 205 bps to 9.1% in Q1 2020. The decline in EBITDA was due to the double-digit growth in OPEX (up 14% y/y), following the increases in Selling and Distribution ex-dep (up 16% y/y) and administrative costs ex-dep (up 12% y/y). Management attributed the growth in OPEX to investments made in marketing and distribution in the animal feeds, packaged food & beverages and paints segments alongside investments made in strengthening management teams across its portfolio companies.
Net Finance Income declined (down 31% y/y) on the back of the decline in Finance Income (down 25% y/y) which outweighed the reduction in Finance Cost (down 11% y/y). We attribute the decline in finance income to the low yield environment. Management noted that the decline in finance cost was supported by lower average interest rates on borrowings.
We highlight that steep decline in the debt of the group (down 72% y/y to N6.8bn in Q1 2020 from N24.6bn in Q1 2019)-this was driven by the exclusion of debts belonging to UPDC in the Group following the reclassification of UPDC as discontinued operations in Q3 2019. Net Cash also rose to N12.7 billion in Q1 2020 from N8.7bn in Q1 2019.
The sharp decline in EBITDA coupled with the decline in Net Finance Income pressured earnings, as Pre-tax Profit from continuing operations declined 30% y/y to N1.7 billion in Q1 2020. A higher effective tax rate of 31% in Q1 2020 compared with 18% in Q1 2019 led to a higher decline in profit after tax from continuing operations, down 42% y/y to N1.1 billion in Q1 2020. However, profit from discontinued operations of N717 million in Q1 2020 compared to the loss of N969 million (as stated earlier) led to a growth of 87% y/y in net profit (N1.9 billion in Q1 2020 compared to N996 million in Q1 2019). EPS rose to N0.85 in Q1 2020 from N0.23 in Q1 2019. We, however, note that EPS from continuing operations stood at No.27, down 38% from N0.44 in Q1 2019, reflective of the weak operating performance in Q1 2020.
We have a target price of N17.0/s on UACN with a BUY recommendation.
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