UAC of Nigeria Plc

UAC OF NIGERIA PLC

Ticker:                            UACNNature of Business:    Diversified IndustriesLocation :                              Nigeria
Recent Price:           NGN9.8052-Week High/Low: NGN10.92/5.13Estimated Fair Value:      NGN13.64-NGN17.78
Expected Return:      47.2%Consider Buy:                   Below NGN15.71Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
UAC of Nigeria Plc (UACN) is a holding company whose operation in Nigeria dates back to 1879.  The company is an active player in the food, beverages, animal feeds, real estate, paints, and logistics sectors of Nigeria's economy. Its subsidiaries include UAC Foods Limited, UAC Restaurants Limited, Chemical and Allied Products Plc, Grand Cereals Limited, Livestock Feeds Plc, Portland Paints and Products Nigeria Plc. UACN boasts of leading brands such as Mr. Biggs, SWAN Natural Spring Water, Gala Sausage Roll, Supreme Ice Cream, Dulux paints, Debonairs Pizza and Binggo Dog Food.

UACN disposed part of its stake in UACN Property Development Company Plc to Custodian Investment Plc, thereby losing a controlling stake in the company. It has also ceded the control of MDS Logistics Limited to Imperial Capital Limited in 2020. The shareholders have approved the merger of  Chemical and Allied Products Plc, and Portland Paints and Products Nigeria Plc.

Management has been growing the business through both organic and inorganic means. The ability to consolidate its market share in the Quick Service Restaurants (QSR) business through franchising is a plus for the management team of UACN. Besides, the company acquired Livestock Feeds Plc and Portland Paints and Products Nigeria Plc in order to enhance its market share in the animal feeds and paints segments of its business.

Mr. Daniel Agbor chairs a nine-man board of directors while Mr. Folasope Aiyesimoju was appointed group managing director in  2019. Mr. Ibikunle Oriola, group finance director, stepped down on  31st December 2020.

Investment Thesis
UACN mitigates its risks with a broad product portfolio. It is a diversified company and a leading player in the animal specialties, building materials, beverages and food products sectors of the Nigerian economy. Livestock feeds, edible oil, paints, packaged food and beverages are the main sources of revenue as they account for over 90% of total sales revenue. UACN has been cutting down its operations by either disposing of or reducing its stake in some of its subsidiaries. Losses from discontinued operations have hurt profits. But the disposal of part of its interest in some of its subsidiaries, in our opinion,  bodes well for UACN. As a matter of fact, the losses from discontinued operations totalled NGN15.1 billion between 2017 and 2019. However, it made a profit of NGN469.7 million from discontinued operations in the year 2020. It is worthy of note that the real estate business segment produced a total loss before tax of NGN18.1 billion between 2016 and 2018 hence the decision to reduce its interest in the business.

UACN should benefit from the Quick Service Restaurant (QSR) business owing to the large branch network of its franchised restaurant, Mr. Bigg's. The QSR has grown its revenue at a Compound Annual Growth Rate (CAGR) of 10.4% over the past three years. But it could not make a profit for two straight years owing to high costs. We believe that increased sales volume and cost containment would help improve turnover and profit margins going forward.

We maintain a buy recommendation for UACN at the current market price of NGN9.80. Its Price/Earnings (P/E) ratio at the 2020 year-end was 5 times and Price to Sales was 0.3 time. Earnings yield rose from -37.4% in 2019 to 19.9% in 2020. Book Value Per Share and Sales Per Share averaged NGN33.44 and NGN37.83 respectively.

Valuation
Book Value Per Share averaged out to NGN39.81; a share of the company trades at 0.3 times book value. We believe that the value of a share of UACN is between NGN13.64 and NGN17.78.  Investors should expect a return of 47.2% from owning a share of UACN.

Financial Overview
UACN  posted revenue of NGN81.4 billion in 2020 compared to NGN79.2 billion announced in the preceding year. Revenue increment was NGN2.2 billion or 2.7%. UACN made revenue from three major business segments namely animal feeds & other edibles, paints, and packaged food & beverages. Together they accounted for over 90% of revenue. The animal feeds & other edibles segment which produces livestock feeds and edible oil made revenue of NGN51.5 billion or 63.3% of total revenue in the 2020 fiscal year compared to 2019 when it posted a revenue of NGN48.9 billion or 61.8% of total revenue. Sales revenue from paints dropped 6.1% to NGN10.3 billion in one year while packaged food & beverages had a 1.5% increase over the prior year’s revenue of NGN17.5 billion.

Gross profit was NGN16 billion in 2020, down from NGN16.6 billion in 2019. Operating profit lost 36.5% to close at NGN3.6 billion while Profit Before Tax (PBT) of NGN5.1 billion represented a year-over-year decrease of NGN2.3 billion or 31.3%.  Earnings Per Share (EPS) of NGN1.44 lagged behind its 10-year average of NGN1.87.

High cost has taken its toll on profit margins. The cost of sales of NGN65.4 billion amounted to 80.4% of turnover; administrative expenses were 9.5% of turnover while 7.1% of revenue was expended on selling and distribution. Gross profit margin trailed its average of 22% by 2.4%. Operating profit margin shed 2.7% to 4.4% while Profit After Tax (PAT) margin decreased to 4.3% from 6.8%.

UACN has paid down its debt and interest has reduced. Debt was NGN4.7 billion as at 31st December 2020 compared to NGN24.2 billion in the penultimate year. Total debt amounted to 7.7% of shareholders' fund and 5.1% of total assets. Short-term debt accounted for 58.4% of total debt. Furthermore, operating profit and cash flow covered interest obligations. Cash and cash equivalents stood at NGN24.3 billion while UACN has net cash of NGN19.6 billion.  However, a 71.3% rise in capital expenditure resulted in a negative free cash flow to the shareholders.  We believe that UACN is liquid and solvent.

Business Risk
Increasing competition in the Quick Service Restaurants business could impact earnings growth and margins. The high cost of operation could also drive down profit margins going forward.

Recommendation: Buy

Earnings Chart of UAC of Nigeria Plc

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