UAC Nigeria Plc. (UACN.NL): Old things have passed away…

• In this report, we resume coverage on UACN with a target price of N8.96 which translates to a BUY rating at current price. While UACN’s history of reporting poor operating performance dulled investor’s sentiment, we believe lower finance cost and little or no impairment charge in coming years, post exit from UPDC, supports a rerating. Coupled with recovery in the feeds business, we see improvement in earnings over our forecast period. Comparing 5-year historical average EV/EBITDA of 9.9x, to current level of 3.3x, UACN presents a good entry point on current valuation. At current price and based on our FY 19E dividend of N0.65, we view expected dividend yield of 10.6% as attractive and could be compelling to investors.

• Restructuring exercise is positive for UACN. Ahead of the planned restructuring of UACN (which would involve UACN’s outright dissolution of its interest in UPDC directly to its shareholders), UPDC was classified as a discontinued operation as at 9M 19 unaudited numbers. Accordingly, related finance cost and impairment charges (through the fair value difference between UPDC REIT and market value) were classified as discontinued operation, leaving UACN 9M 19 numbers at the strongest level we modelled post restructuring. With the exclusion of UPDC from 9M numbers and restatement of prior year, UACN delivered EBIT and PBT expansion of 175bps and 150bps YoY respectively, with EPS growing 30% YoY. Notably, without the exclusion of UPDC and restatement of the prior year, UACN would have reported a loss after tax of N12.8 billion (9M 18 loss of N994 million). With the exclusion of the volatility emanating from impairment charge on the real estate property and higher finance expense (UPDC account for 80% to 90% of total UACN borrowings) we expect stable growth in earnings over our forecast period, with EPS CAGR of 12.4% between 2020 and 2024.

• Recovery in feeds business to soften OPEX pressure. Our market survey revealed that OLAM and UACN’s feed products now sell at similar price points, as OLAM steps down its aggressive pricing strategy. As a result, we see improvement in sales from feeds with contribution to group revenue gradually picking up to pre-2018 levels. In the short term, we believe the extended border closure creates some incentive for sales upside for local poultry products and by extension the feeds business.

• Value play or value trap? With the recovery in sale of feeds already evident in the 9M 19 numbers, amidst flattened cost, we expect improvement in gross and operating margins by 117bps and 116bps YoY to 19% and 3.9% respectively in 2019. Though the management guided to an improvement in its operating expense, we are less optimistic of a significant change as the company has only been able to tame the cost and not reduce it as at 9M 19. On that note, we left opex to sales ratio unchanged at 15% till 2020 and gradual improvement from 2021 with mild improvement in operating margin to 4.1% in 2020 and average of 7% over FY21-24. Further down, with reduced finance cost and absence of impairment charge, following the reclassification of UPDC as discontinued operation, we expect earnings from continued operation to print at N1.35 in 2020 (N1.32 in FY 19E from a loss per share of N2.08 recorded in the prior year) with 5-year earnings CAGR of 12.4% between 2020 and 2024. At current market price, UACN trades at 2019E and 2020E EV/EBITDA of 3.12x and 3.01x respectively, which is attractive when compared to 5-year historical average of 9.9x.

Stock Recommendation for the Week, November 12

The Nigerian bourse ended last week in green as gains particularly on Monday (+41bps) and Friday (+48bps) trading muted losses observed every other day of the week. Consequently, the ASI as well as Market Cap increased by 8bps WoW to 26,314.49 pts and N10.3 billion respectively. Banking sector (+8.07%) anchored the gains while other sectors closed negative, with bulk of the decline seen in Personal Care (-20.45%) WoW. On stock performances, ACCESS (+17.95%), FCMB (+16.25%), UBA (+13.79%), GUARANTY (+13.49%), CCNN (+10.06%) recorded gains muting declines in UNILEVER (-26.59%), INTBREW (-25.4%) and DANGCEM (-2.47%) WoW amongst others.

• DANGCEM– STRONG BUY (FVE: N240.87): DANGCEM’s earnings will be pressured this year (EPS: N14, vs N22 in 2018) owing to lower volumes in Nigeria business (due to increased competition from BUA Cement) and some of its Pan Africa business, as well as high base of tax credits from last year. That said, DANGCEM currently trades at FY 19E P/E of 11x on our estimates, which is cheap compared to WAPCO and CCNN of 17.7x and 16.8x, respectively. We believe current valuation is unjustified given the superior ROE of 24%.

• Nigerian Breweries Plc – STRONG BUY (FVE: N75.82): Intense competition from International Breweries (IB) and graduated excise duty (+17% YoY) that kicked-off in Jan-19, revenue growth is expected to be slow even as we expect higher finance cost (+38% YoY) to be another pressure point to earnings this year. However, given our case for a slight improvement in volumes and decline in cost of sales (-1.1% YoY) which translates to gross (+120bps YoY) and EBIT (+101bps YoY) margin expansion, the misery seems moderated. Overall, the net impact of all our adjustments translates to PBT of N29.9 billion and EPS of N2.58 (+6.3% YoY) over 2019.

• Guaranty Trust Bank Plc – STRONG BUY (FVE: N49.66): GTB’s 9M 19 earnings expanded modestly with PAT and EPS expanding only 3.4% YoY to N146.9 billion and N4.99/share respectively. Although, we expect a slower growth in EPS (+4% YoY to N6.53) over 2019, our case for GUARANTY remains the resilience in NIR, improved cost management, still strong loan book with a moderate expansion in credit loss provision to 0.5%.

• Nestle Plc – STRONG BUY (FVE: N1447.39): Amongst the food producers, Nestle Nigeria Plc has managed to stay afloat, reporting modest growth in earnings amidst incessant competition. For 9M 19, EPS expanded by 11.2% YoY to N46.48 driven largely by the absence of impairment charges which created a high base for input costs over the same period last year. Asides from improved earnings, its strong cash balance, return on equity and 100% dividend payout further supports the case for a STRONG BUY rating.

• Seplat Plc – STRONG BUY (FVE: N828.90): Following a stronger than expected oil exit rate in Q2 19, we have revised our FY19E total production estimate slightly higher to 50,266 boepd (previous: 49,765boepd) and crude oil price to $63.9/bbl. (previous: $60/bbl.). This coupled with a surprise gas toll revenue of $67 million in Q2, increased 2019E revenue to $701 million (previous: $656 million). Thus, our 2019E EPS and FCF/s were revised higher to $0.33 and $0.12, from previous estimate of $0.31 and -$0.02, respectively.

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ASK SADE: Help! My daughter-in-law wants my son to write a Will

ASK SADE: Help! My daughter-in-law wants my son to write a Will

Dear Sade,

My son who is 34 years old called to tell me that his wife of 2 years is encouraging him to write his Will. I’ve tried to wrap my head around it. I, his father who is 70 have not written a Will and this young woman is telling my son to. Should I be worried? My wife is already painting scary scenarios that cause us to suspect our daughter-in-law who has by the way been nothing but good to us. Please reply.

Thank you.

Mr. Anthony from Port Harcourt

 

ANSWER

Dear Mr. Anthony,

I can understand why you would have concerns regarding your daughter-in-law’s advice to your son.  Writing a Will is typically not a common practice for young people, and it could be perceived as absurd in our society, that a wife would be encouraging her young husband to have one in place. More so, there is the myth that writing one’s Will inevitably leads to the person’s death.

While your daughter-in-law’s actions may appear bold and even worrying to some, I encourage you to be dispassionate in your view so as to appreciate the benefits of actually having a Will in place, not just for your son’s benefit but also yours. A Will offers one peace of mind knowing that one’s estate and affairs are in order. It gives one the opportunity to determine how and to whom his/her assets would be distributed at his/her demise. It also serves as an inventory of assets to help family members identify the assets at the relevant time.

Where there is no Will in place to determine what becomes of a deceased person’s estate, family members left behind, in addition to the emotional distress they have to deal with at the loss of their loved one, are more often than not also left in a state of confusion as to how to administer or access the assets of the deceased. This is certainly not an ideal situation for anyone to leave his or her family in.

Please consider your daughter-in-law’s actions as noble and encourage your son to do what is best for his family. You should also take decisive steps towards putting your estate plan in place by engaging a reputable firm renowned in these matters to advice you on what estate plan best suits your circumstances.

I wish you and your family the very best.

Cheers,

Sade

The post ASK SADE: Help! My daughter-in-law wants my son to write a Will appeared first on Realising Ambitions.

ASK SADE (November 2019)

November

Dear Sade,

My son who is 34 years old called to tell me that his wife of 2 years is encouraging him to write his Will. I’ve tried to wrap my head around it. I, his father who is 70 have not written a Will and this young woman is telling my son to. Should I be worried? My wife is already painting scary scenarios that cause us to suspect our daughter-in-law who has by the way been nothing but good to us. Please reply.

Thank you.

Mr. Anthony from Port Harcourt

 

ANSWER

Dear Mr. Anthony,

I can understand why you would have concerns regarding your daughter-in-law’s advice to your son.  Writing a Will is typically not a common practice for young people, and it could be perceived as absurd in our society, that a wife would be encouraging her young husband to have one in place. More so, there is the myth that writing one’s Will inevitably leads to the person’s death.

While your daughter-in-law’s actions may appear bold and even worrying to some, I encourage you to be dispassionate in your view so as to appreciate the benefits of actually having a Will in place, not just for your son’s benefit but also yours. A Will offers one peace of mind knowing that one’s estate and affairs are in order. It gives one the opportunity to determine how and to whom his/her assets would be distributed at his/her demise. It also serves as an inventory of assets to help family members identify the assets at the relevant time.

Where there is no Will in place to determine what becomes of a deceased person’s estate, family members left behind, in addition to the emotional distress they have to deal with at the loss of their loved one, are more often than not also left in a state of confusion as to how to administer or access the assets of the deceased. This is certainly not an ideal situation for anyone to leave his or her family in.

Please consider your daughter-in-law’s actions as noble and encourage your son to do what is best for his family. You should also take decisive steps towards putting your estate plan in place by engaging a reputable firm renowned in these matters to advice you on what estate plan best suits your circumstances.

I wish you and your family the very best.

Cheers,

Sade