UAC’s Rough Patch

Poor results from some of business lines are impacting negatively on the fortunes of one of the country’s leading conglomerates, UAC of Nigeria Plc, writes Goddy Egene

The Nigeria’s economy was said to have officially recovered from recession last year but many companies are still suffering from the negative impact. One of the leading and oldest conglomerates, UAC of Nigeria (UACN) Plc is among the companies affected by the challenging operating environment partly caused by the recession.

As a group that has business lines across various sectors of the economy, certain sectors have been a drain on the company. The group’s performance has equally been affected by high cost of operations. Consequently, UACN posted a decline of 83 per cent in profit after tax for the year ended December 2017. The company is showing signs of improvement as decline in its bottom-line for the first quarter (Q1) ended March 31, 2018, was marginal. However, sustaining that improvement going forward is a task the company must achieve so as to end the current financial year with a better result.

2017 Performance

The performance of the conglomerate in 2017 was affected by huge finance cost that drove its bottom-line down by 83 per cent. The audited results of UACN showed revenue of N89.178 billion, down by eight per cent from N82.572 billion. Cost of sales rose from N65.639 billion to N73.222 billion in 2017, bringing gross profit to N15.956 billion, down from N16.932 billion in 2016.

Sales and distribution expenses increased from N3.155 billion to N4.595 billion, while administrative expenses followed same pattern rising from N6.511 billion to N6.898 billion in 2017.

Operating profit fell by 19 per cent to N7.031 billion, from N8.639 billion. However, net finance cost soared by 218 per cent from N1.361 billion to N4.324 billion in 2017.

The surge in the cost of finance was fueled by high interest charges paid on bank borrowings. UACN paid N5.984 billion on charges on loans and overdraft from banks. Profit before tax stood at N3.246 billion, showing a decline of 61 per cent from N8.368 billion, while PAT fell by 83 per cent to N962 million in 2017 compared with N5.666 billion in 2016.

Assessing the fourth quarter results, analysts at FBN Quest said they were hit by rising input, finance and operating costs as well as increasing competition across key businesses. According to them, group sales of N20.4 billion ( in Q4) declined 21 per cent while PBT fell by 88 per cent to N202 million.

“The drivers behind the significant decline in PBT were an 80 per cent rise in operating expenses to N3.5 billion a 64 per cent decline in other income to N756 million and a 130 per cent rise in net finance charges. UACN also posted a large loss on the income from associate’s line. Sales for the food and beverages segment are now more important to the business. Combined, this segment accounted for 86 per cent and 83 per cent of group sales in Q4 2017 and FY 2017 respectively. As such, increasing challenges within this segment, especially for the animal nutrition businesses, is likely to impact profitability going forward,” FBN Quest.

According to the analysts, compared with their estimates, sales and PBT both missed by 22 per cent and 89 per cent respectively.

“The major drivers of the variance were a weaker- than- expected top- line growth and negative surprises on both operating expense and other income.”

UPDC as a Drag

It is clear that the real estate subsidiary of UACN, UACN Property Development Company ( UPDC) Plc, has been a drag on the performance of the conglomerate. The subsidiary recorded another loss in 2017 financial year. UPDC had slipped into the red in 2016 with a loss of N1.551 billion, which it attributed to recognition of losses on certain projects and impairment of investments in one joint venture project, foreign exchange losses and negative performance of its hotel asset.

Although the company had assured stakeholders of efforts being made to ensure better performance in 2017, its loss position has worsened.

UDPC recorded revenue of N3.983 billion in 2017, down 20 per cent from N4.994 billion in 2016. While the company reduced administrative expenses from N1.256 billion to N859 million, finance cost soared due to huge interests paid on bank borrowings and overdrafts. Net finance cost jumped by 78 per cent from N2.835 billion in 2016 to N5.030 billion in 2017.

As a result, UPDC ended 2017 with loss of N2.947 billion, compared with a loss of N1.551 billion in 2016. Chairman of UPDC Plc,

Mr. Larry Ettah, who retired as Managing Director of UACN last December and then chairman of UPDC, had last year told shareholders at the annual general meeting (AGM) that despite the challenging business terrain the company and commenced new ones in 2017.

“A key strategic imperative for 2017 is to deleverage the company. This is being achieved through deployment of an aggressive sales strategy, one for one Rights Issue that is about to be launched, and divestment from low yielding investment properties. The fundamentals of the company are strong and the brand remains positioned to deliver value to all stakeholders,” he said.

Ettah had said the Nigeria’s real estate market still presents substantial opportunities as well as a number of challenges for property investors and developers.

He said: “Cumbersome and timeconsuming processes for land acquisition, insecure land title, infrastructure deficiency are few of the challenges of the sector. Existing concerns such as underdeveloped mortgage market, paucity of medium to long term infrastructure and financial institutions with reasonable interest rates are areas the federal government would need to pay particular attention to in the near future in order to move the sector forward.”

First Quarter Performance

Although the subsidiaries are yet to fully recover, the Q1 performance of UACN has shown improvement as cost of finance reduced significantly due to injection of equity capital through rights issue. Existing shareholders of UACN injected N15.4 billion into the company’s operations. Also, as part of efforts to become more efficient, the company decided to close down one of its subsidiaries, Warm Spring Waters Limited( WSWL) due to poor performance. The conglomerate owns 76 per cent equity in the company that is based in Ikogosi- Ekiti State.

The 2018 Q1 results of UACN showed revenue of N18.312 billion, down from N24.384 billion. Cost of sales fell from N20.379 billion to N14.746 billion, bringing gross profit to N3.566 billion, compared with N4.00 5 billion.

Selling and distribution expenses rose from N777 million in 2017 to N1.042 billion, while administrative expenses stood at N1.574 billion as against N1.509 billion in 2017. However, net finance cost fell by 64 per cent from N1.233 billion to N446 million. UACN ended the period with PAT of N598 million compared with N605 million in 2017.

Looking at the Q1 results on segmental basis, FBN Quest said sales for the food & beverage business declined by 29 per cent to N14.0 billion, driven by lower revenues within the animal nutrition business.

They explained that UACN’s real estate and paints businesses posted relatively weaker revenues.

“A gross margin expansion of 304 basis points ( bps) to 19.5 per cent and a 64 per cent decline in net finance charges were the primary drivers behind the recovery in profitability. We note, however, that PBT for the food & beverage segment declined by around 50 per cent to N416 million, driven by increased operational and input costs in the animal nutrition business. According to management statements, this particular business posted a combined (Grand Cereals and Livestock Feeds) loss before tax of N26 million in Q1 2018. On a sequential basis, sales declined 10 per cent quarter on quarter (q/q) while PBT was up significantly (382 per cent q/q). The q/q PBT growth was primarily driven by base effects on the net finance expense line (N1.2 billion in Q4 2017 compared with N446m in Q1 2018),” FBN Quest said.

The analysts said compared with their estimates, sales and PBT both missed by is per cent and 37 per cent respectively.

According to them, the major drivers of the variance were the topline decline and negative surprises on the gross margin, opex and other income lines. “Combined, these more than fully offset benefit coming through from the moderating interest expense line. All revenue lines surprised negatively. On an annualised basis, UACN’s Q1 sales and PBT are tracking well behind of consensus’ N96.4 billion and N8.2 billion forecasts, respectively,” they said.