UACN Property Development Company (UPDC) 16,799,893, Days Series 1 Commercial Paper under the 24 billion Programme

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1 UACN Property Development Company (UPDC) 16,799,893, Days Series 1 Commercial Paper under the 24 billion Programme CP Rating S3* *This CP rating is equivalent to A- for a long term rating Issuer Rating: Bb- Outlook: Stable Issue Date: 21 April 2016 Expiry Date: 31 December 2016 The rating is valid throughout the life of the instrument and will be subject to periodic monitoring and review. INSIDE THIS REPORT Rating Rationale 1 Company Profile 3 Financial Condition 6 Commercial Paper Structure 9 Ownership, Mgt & Staff 10 Outlook 12 Financial Summary 14 Rating Definitions 18 Analysts: Olusegun Owadokun olusegunowadokun@agusto.com Isaac Babatunde isaacbabatunde@agusto.com Agusto & Co. Limited UBA House (5th Floor) 57, Marina Lagos Nigeria RATING RATIONALE UACN Property Development Company Plc ( UPDC, the Issuer, or the Company ) is a major player in the Nigerian Real Estate Industry. The Company, which is a subsidiary of UAC of Nigeria Plc ( UACN ), is primarily focused on the acquisition, development, sale, management and leasing of both residential and commercial properties in Nigeria. UACN Property Development Company Plc plans to issue a 16,799,893, ( 16.8 billion) 183 days unsecured commercial paper ( series 1 ), being the first tranche under its 24 billion Commercial Paper Issuance Programme in The Series 1 ( the Commercial Paper, the CP, the Notes or the Issue ) would be used exclusively to refinance the Company s short-term borrowings. The rating assigned to the Issuer reflects its satisfactory cash flow and good track record in the Real Estate Industry as well as stable management team. However, UPDC s performance is tempered by declining revenue, weak profitability, inadequate working capital and high leverage. The rating assigned to the Commercial Paper has been elevated from the Issuer rating on account of the partial corporate guarantee issued by UAC of Nigeria Plc capped at 46% of the CP programme in the unlikely event of default as well as the 10 billion Revolving Liquidity Support Facility to be jointly arranged by FBN Merchant Bank Limited and Coronation Merchant Bank Limited (the lenders) for the Series 1 issue. The Series 1 CP is a senior unsecured obligation of the Issuer and the Notes will rank pari passu with other present and future senior unsecured obligations of the Company outstanding from time to time. Consequently, the Company will be primarily responsible for meeting the obligations of the Issue from its operating cash flow. In our opinion, the Issue has moderate credit risk on account of the financial condition of the Issuer and largely on the additional credit enhancements provided by the parent company (UACN) and the Lenders The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

2 Agusto & Co. therefore assigns a Bb- rating to UACN Property Development Plc and S3 to the Series 1 Commercial Paper. Figure 1: Strengths, Weaknesses, Challenges & Opportunities Strengths Strong franchise value in the Nigerian Real Estate Market Stable & experienced management team Weaknesses Weak profitability Inadequate working capital High leverage Challenges Increased business risk given the current challenging macroeconomic environment Security challenges in the Northern region of the country Weak purchasing power and its adverse impact on residential real estate High inflation & volatile FX which pushes up construction costs Opportunities Nigeria's huge housing deficit (estimated to be about 17 million units) Rising middle class 2

3 COMPANY PROFILE UAC Property Development Company Plc was carved out of the real estate division of UAC of Nigeria Plc in 1997 and was incorporated as a public limited liability company. UPDC became listed on the Nigerian Stock Exchange on 19 November The Company s principal activities are the acquisition, development, sale, management and leasing of commercial and residential properties. UPDC s real estate portfolio mainly comprises properties in upscale locations within Lagos, Port-Harcourt, Abuja, Asaba, Ibadan and Calabar. The Company broadly classifies its properties into Property Stock and Investment Properties. Property Stock are the properties built for sale, while Investment Properties are commercial and residential properties developed and held for capital appreciation and rental income. Residential properties are further sub-divided into classic homes, premium homes and luxury apartments. The Company also produces residential houses targeted at middle-class salary earners with access to mortgage finance, known as Comfort Homes, which are priced between 20 million and 25 million. In 2013, UPDC issued a Real Estate Investment Trust (REIT) and transferred some notable properties to the REIT including Victoria Mall Plaza (VMP) Phase 1 - a 42 unit luxury apartment block located in Victoria Island, Lagos; VMP 2 a 15-level, purpose-built office complex with 7,454m 2 rentable space also located in Victoria Island, Lagos; and Abebe Court - a luxury estate comprising 32 units of 3-bedroom and 4-bedroom flats located in Ikoyi, Lagos. The Company currently acts as property manager for all the REIT assets and receives fees for this service. The REIT has consistently been paying cash distributions since 2014 and Table 1 shows the performance history of the REIT over the period: Table 1: REIT Performance History S/N DESCRIPTION PAYMENT DATE VALUE DIVIDEND YIELD EARNINGS YIELD 1 Distribution #1 December 4, 2014, 13 -month period ended June Distribution #2 April 28, 2015, 19 - month period ended December Distribution #3 December 21, 2015, 6 -month period ended June 2015 PROJECTED EARNINGS YIELD 56 Kobo 5.6% 15.2% 8.79% 31 kobo 8.7% (Cumulative 18.2% 12.02% for the period ended December 2014) 43 Kobo 4.3% 5.9% 4.83% UPDC has 61.5% stake in the REIT, while the remaining is held by other investors. As part of strategy to inject fresh capital into the business, the Company plans to reduce its shareholding in the REIT to 40% by offering for sale 21.5% of its stake to the public. The sale, which is projected to be concluded by mid-2017, will generate an estimated 6.5 billion. Table 2 shows a summary of notable assets in UPDC s portfolio including recently completed and on-going projects. 3

4 Table 2: UPDC s List of Completed and On-going Projects S/ N PROJECT NAME / LOCATION CATEGORY STRUCTURE NO. OF UNITS VALUE (N M) ESTIMATED COMPLETION TIME COMMENTS 1 Metro City, Apo Dutse Abuja Residential (Premium) JV with African Capital Alliance b Phase 1 Completed Phase 1 Completed. 2 Festival Mall, Festac Amuwo, Lagos Retail JV with African Capital Alliance and REIT N/A 7.9b Completed Completed in December Pinnacle Apartments, Maitama, Abuja Residential (Luxury) JV with Imani & Sons b April 2016 To be completed in April Olive Court, Agodi GRA, Ibadan Residential (Premium) JV with Oyo State Government b June 2016 Phase 1 comprising 15 units completed. Phase 2-Work in progress; to be completed in June Pineville, GRA Asaba Residential (Premium) UPDC b April 2016 Phase 1 comprising 9 units to be completed in April Golf Estate, Summit Hills, Calabar. Residential (Premium) JV with Cross River State Government b March typologies In progress 7 James Pinnock Place, Lekki Lagos 8 The Residences, Festac Amuwo Odofin, Lagos 9 Alexander Miller Apartments, Lekki Lagos Residential (Premium) Residential (Premium) Residential (Premium) JV with the REIT b June 2017 A mix of Shell and finished buildings. UPDC b March 2016 Project is at 95% Completion UPDC b December 2016 Work is in progress. 10 Galaxy Mall and Galleria, GRA Kaduna Retail JV with Kaduna State Govt. N/A 4.9b January 2018 Ground breaking done and Contractors to be mobilised 11 VMP 3 Car Park and Event Centre Mixed use JV Partner is still being sourced N/A 7.6b July 2017 Contractors mobilized, pilling works on-going 4

5 UPDC has two subsidiaries, UPDC Hotels Ltd and Manor Gardens Property Development Company. UPDC Hotels Ltd oversees the operations of Golden Tulip Festac Hotel - the former Festac 77 Hotel, which was purchased from the Federal Government in The hotel has 471 rooms, restaurants, conference & banquet facilities, sporting facilities, offices and shops. Manor Gardens Property Development Company (MGPDC) was incorporated in 2002 and is jointly owned by UPDC Plc (67.5%) and Top Services Limited (32.5%). UPDC s head office is located at UAC House, 1-5 Odunlami Street, Lagos Island, Lagos. The Company s major shareholders are UAC of Nigeria Plc (46%) and First Trustees Nigeria Ltd (9%). Individuals and other corporate bodies hold the balance of the Company s equity (45%). UPDC is governed by a seven-member Board of Directors, comprising two executive directors and five nonexecutive directors. Mr. Larry Ephraim Ettah leads the Board as Chairman, while Mr. Hakeem Ogunniran is the Managing Director. In the year under review, there were no changes to the Board. In 2015, UPDC employed an average of 126 persons (2014: 131 persons). As at 31 December 2015, UPDC s total assets stood at 70.8 billion, while shareholders funds amounted to 35.3 billion. During the same period, the Company generated 3.7 billion revenue, but recorded a loss after tax of 1.4 billion. Table 3: Current Board of Directors CURRENT DIRECTORS Mr. Larry Ephraim Ettah Mr. Hakeem Ogunniran Mrs. Folasade O. Ogunde Mrs. Halima Tayo Alao Mr. Abdul Akhor Bello Mr. Adekunle Awojobi Prof. Okon Ansa Chairman Managing Director Finance Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Table 4: Shareholders Composition SHAREHOLDERS EQUITY STAKE (%) UAC of Nigeria Plc 46 First Trustees Nig Ltd 9 Others

6 FINANCIAL CONDITION ANALYSTS COMMENTS The proposed 16.8 billion Series 1 Commercial Paper under the N24 billion Commercial Paper Issuance Programme is repayable primarily from the operating cash flow of UPDC; hence we have analysed the financial condition of the Company for the year ended 31 December PROFITABILITY UACN Property Development Company Plc generates revenue primarily from the acquisition, development, sale, leasing and management of residential, retail and commercial properties in the luxury, premium and classic segments of the Nigerian real estate market. During the year ended 31 December 2015, the Company s revenue amounted to 3.7 billion, representing a 63% decline from prior year. The reduction in revenue was largely attributed to the non-recognition of some properties pre-sold which did not meet the revenue recognition criteria as well as the James Pinnock Development which could not be recognised as income due to the fact that the project is now being executed under a joint venture arrangement. The challenging macroeconomic environment, insecurity in the North-East and the uncertainty regarding the 2015 General Elections also contributed to a slowdown in sales during the review period. Sale of property stock was the largest contributor to revenue at 75% in Rental income and project management fees contributed 14% and 11% respectively during the period under review. Figure 2: Breakdown of Sales Project Management Fees 11% Rental Income 14% Property Stock 75% Figure 3: Operating profit & PBT margins 85% 69% 65% 47% 45% 12% 23% 21% 25% 8% 5% Operating profit margin Profit before tax margin The Company s costs of sales to turnover ratio improved to 67%, compared to prior year (84%). This resulted in a higher gross profit margin of 33% in 2015 as against 16% recorded in the prior year. Although UPDC operating expenses dropped by 8.6% to million, the Company s operating expenses-to-sales ratio rose from 8.5% in 2014 to 21% in 2015 due to declining sales. In the year under review, UPDC recorded an operating profit of million, representing a drop of 45% over previous year. In addition, the Company s profit before interest & tax declined considerably by 81% to million (2014: 4.7 billion) mainly due to a 2.1 billion impairment charge. This charge was as a result of erosion in value of the Company s equity investment in UPDC Hotels Limited which accounted for the 89% drop in other income during the year. The Golden Tulip Festac Hotel has been struggling of late with average 6

7 occupancy rate of 28% in 2015 (2014: 37%) due to the traffic and security concerns in the Festac area. Consequently, UPDC posted a loss before tax of 1.8 billion in 2015 (2014: profit before tax of 2 billion). However, the loss after tax dropped marginally to 1.5 billion on account of the tax benefits claimed in the year. Due to the loss recorded during the year under review, the Company s profitability indices were generally poor with a pre-tax return on assets (ROA) of 0.07% and a negative pre-tax return on equity (ROE) of 5% in Looking ahead, UPDC intends to recognize its pre-sold properties from prior year and also increase sales of commercial real estate units. In addition, the one-off impairment charge of 2.1 billion which eroded profit in 2015 is not expected to reoccur in the current year. Consequently, we expect UPDC s profitability to improve in the short to medium term. In our opinion, the Company s profitability is weak and requires improvement. CASH FLOW UPDC generates cash from outright and off-plan sale of properties, rental income and management fees on investment properties as well as from distribution by UPDC REIT. During the year ended 31 December 2015, UPDC s operating cash flow (OCF) rose by 6% to 4 billion over prior year. The improvement in OCF was driven principally by significant increases in amounts due to related parties and trade creditors. Although the OCF was sufficient to pay returns to providers of financing as well as estimated mandatory capital expenditure during the period, it was not adequate to cover amortised estimated principal. Figure 4: Operating cash flow ratios 280% 230% 180% 130% 80% 30% 239% 116% 109% 106% 76% 38% Operating Cash Flow/Sales Operating Cash Flow/Providers of financing Over the last three years, the Company recorded cumulative OCF of 15 billion and this was sufficient to pay returns to providers of financing amounting to 10.1 billion during the period. However, the net cumulative OCF was not adequate to cover estimated loan principal of 7.6 billion during the period. UPDC s three-year weighted averages for operating profit margin (12%) and OCF as a percentage to providers of financing (148%) are both in line with our benchmark. In the same vein, the Company s OCF to sales ratio of 109%, largely on account of pre-sales of properties, surpassed our expectation. However, we note the declining trend in OCF/providers of financing ratio in the last three years due to the drop in sales amidst rising financing costs. Overall, UPDC s cash flow position is satisfactory. 7

8 In billions of Naira UPDC s 16.8 Billion 183 days Series 1 Commercial Paper FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL As at 31 December 2015, UACN Property Development Company Plc had working assets of 35.1 billion, consisting largely of amounts due from related parties (58%), stocks (35%) and trade debtors (5%). Related parties dues comprised receivables from the parent company, UACN and other associated companies. As at the same date, the Company s spontaneous financing which comprised mainly amounts due to related parties (55%), trade creditors (22%) and other creditors & accruals (11%) stood at 12.7 billion. UPDC s spontaneous financing was inadequate to fund the working assets, leaving a working capital need of 22.4 billion. Figure 5: Working capital surplus/ (deficiency) As at 31 December 2015, the Company s long term assets 0 stood at 35.6 billion, while long term funding which (5) consisted of equity (85%) and long term borrowings (15%) (10) amounted to 41.6 billion. UPDC s long term funds were (15) 16 (16) therefore sufficient to cover the long term assets leading to a (20) (19) working capital balance of 6 billion. However, the available working capital was not enough to cover the short term capital need, leaving an overall working capital deficiency of 16.4 billion. We note negatively that the Company has been running working capital deficiencies over the last three years. In our view, the Company s working capital is inadequate. LEVERAGE As at 31 December 2015, UPDC s total liabilities, comprising interest bearing (64%) and non-interest bearing liabilities (36%), amounted to 35.5 billion. The interest bearing liabilities were made up of short term and long term borrowings of 67% and 33% respectively. Trade creditors, other creditors & accruals and a portion of amounts due to related parties largely accounted for the 36% non-interest bearing liabilities. Figure 6: Leverage ratios 70% 60% 50% 40% Total interest bearing liabilities/equity The Company s interest bearing debt as a percentage of equity (65%) and net debt as a percentage of total assets (51%) are both within our threshold. UPDC s interest expense as a percentage of sales in 2015 was very high at 71%, which leaves little room for financial flexibility. The Company s three-year cumulative interest cover ratio of 205% was also below our benchmark. In our opinion, UPDC has a high leverage. Net debt/total assets 8

9 COMMERCIAL PAPER STRUCTURE UACN Property Development Company Plc plans to issue a 16.8 billion 183 days unsecured commercial paper ( Series 1 ) in 2016, representing the first tranche under its 24 billion Commercial Paper Issuance Programme. The net proceeds of the first tranche, which will be issued at a market-reflective rate, will be used solely to refinance existing short term borrowings of the Company, which were priced at an average interest rate of 16.6% as at 31 December The Commercial Paper Programme is supported by a partial corporate guarantee of the parent company, UAC of Nigeria Plc, subject to a limit of 46% of the CP Programme. The Programme is equally backed by a 10 billion Liquidity Support Facility which will be jointly provided by FBN Merchant Bank Limited and Coronation Merchant Bank Limited with each lender contributing 5 billion each. The purpose of the Facility is to provide liquidity back stop for the 16.8 billion Series 1 Commercial Paper. The total value of these enhancements for the Series 1 CP is estimated to be 17.7 billion, representing a coverage ratio of 105%. Table 5: Schedule of Credit Enhancements for the CP Issuance Programme S/N Description Rating Support Type Value ('N'million) 1 UAC OF Nigeria Plc A- Guarantee -46% of the CP Programme 2 FBN Merchant Bank *No Liquidity Support current Facility rating 3 Coronation Merchant Bank A- Liquidity Support Facility Guaranteed value-series 1('N'Million) 11,040 7,728 5,000 5,000 5,000 5,000 Total Credit Support 21,040 17,728 *Subsequent to the acquisition of Kakawa Discount House Limited by FBN Holdings in November 2014, Kakawa Discount was upgraded to a merchant bank to form the new FBN Merchant Bank Limited in Kakawa Discount was rated A- by Agusto & Co. shortly before the acquisition. However, the rating is no longer valid following acquisition and rebranding. The CP issued under the Programme will be zero-coupon notes denominated in Naira and as such, will be offered and sold at a discount to face value. The Issue will thus not bear interest, and the Issuer will not be required to withhold or deduct tax from payments in respect of the Notes to the Noteholders. However, the discount on the Notes may be taxed in accordance with applicable Nigerian tax laws. The Note will be issued through book-entry deposit by crediting the Central Securities Clearing System (CSCS) account of applicants and a Register of Noteholders shall be maintained by the CSCS The Series 1 CP will be issued at a market-reflective discounted price redeemable only at maturity at a par value of 16.8 billion. Each Note constitutes a senior unsecured obligation of the Issuer and the Notes rank pari passu with other present and future senior unsecured obligations of the Issuer outstanding from time to time. The nominal amount per note is 1,000 with a tenor of 183 days. 9

10 In accordance with the Deed of Covenant, a Register of Noteholders shall be maintained by the Central Securities Clearing System. The Register shall reflect the number of Notes issued and shall contain the name, address, and bank account details of the registered Noteholders as well as the aggregate principal amount of the Notes issued to such Noteholder and the date of issue. The payments of outstanding obligations in respect of the Noteholders shall be by electronic transfer. OWNERSHIP, MANAGEMENT & STAFF As at 31 December 2015, UACN Property Development Company Plc had 1,718,750,000 ordinary shares of 50 kobo each issued and fully paid, with UAC of Nigeria Plc (UACN) holding the largest stake of 46%. FBN Trustees Nigeria Limited held 9% shareholding, while the balance of 45% was held by other individuals & corporate bodies as at that date. The Company has a seven-member Board of Directors comprising two executive directors and five non-executive directors. The Board is led by its chairman Mr. Larry Ephraim Ettah, while the Managing Director is Mr. Hakeem Ogunniran. UPDC s management team led by the Managing Director is made up of nine members, with each bringing on board cumulative years of diversified and relevant cognate experience. We note that majority of the management team have been with the Company or related companies within the Group for over ten years. In our opinion, UPDC s management is stable and has requisite experience in the management of real estate development business. As at 31 December 2015, UPDC had 126 employees compared to 131 employees in the prior year. In the year under review, the Company s average cost per employee rose by 13% to 4.2 million. However, the revenue per staff dropped by 58% to 32 million due to the decline in sales in The revenue per staff was able to cover average cost per employee 7.6 times in the year under review (2014: 20.6 times), which we consider to be satisfactory. Management Team Mr. Hakeem Ogunniran is the Managing Director of UPDC. He holds LL.B, LL.M and MBA degrees from the University of Lagos. Between 1986 and 1992, he lectured at the University of Ilorin and the University of Lagos. Subsequently, Mr Ogunniran worked at Goldlink Insurance Company Ltd as the Group Secretary/Legal Adviser. He joined UACN as Manager, Legal Services in 1995 and was later appointed Western Area Manager and Marketing Manager of GBO/MDS Division of UACN. He was appointed Divisional Managing Director of MDS Logistics, a division of UACN in April Mr Ogunniran was appointed the Managing Director of UPDC in January

11 A former Fulbright Scholar, he has attended various senior management and leadership programmes at Ashridge Management College, UK; Cranfield University, UK; Harvard Business School; and London Business School. Mr. Ogunniran is a Fellow of the Institute of Chartered Secretaries and Administrators, London and Nigeria. He is also a Fellow of the Chartered Institute of Arbitrators, United Kingdom. Mrs. Folasade Ogunde is UPDC s Finance Director. She holds a Bachelor s degree in Economics from the University of Ife (now Obafemi Awolowo University), Ile-Ife. Mrs. Ogunde is a Fellow of the Institute of Chartered Accountants of Nigeria (ICAN) and holds the FMP certification from the International Facility Management Association (IFMA). She started her career with the firm of Deloitte Haskins & Sells before joining UACN in She has held various positions within the Group including Management Accountant, UAC Foods; Divisional Commercial Director, Mr. Biggs s (now UAC Restaurants); and Group Treasurer, UACN. She was appointed the Finance Director of UPDC in Mrs. Ogunde has attended senior management and leadership programmes at Ashridge Management College, UK; Cranfield University, UK; and Harvard Business School, USA. Other members of UPDC Plc. s management team include: Mr. Yemi E. Ejidiran Mr. Brian Greenaway Ms. Titilayo Gbadamosi Mr. Abolade Ajolopo Mr. Charles Enahonna Ms. Folake Kalaro Ms. Emem Essien Director, Business Development Director, Technical Operations GM, Sales & Marketing Manager, Estates GM, Procurement & Supplies Manager, Legal Services Human Resource & Change Manager 11

12 OUTLOOK The anxiety surrounding the 2015 general elections, combined with the plunge in oil prices and the fragile security situation in the North Eastern part of the country, made 2015 a very challenging year for businesses in general and the Real Estate Industry in particular. The depreciation and volatility of the Naira compounded the woes for businesses last year. This was reflected in the drop in GDP growth rate from 6.23% in 2014 to 2.8% 1 in Agusto & Co expects the slowdown in GDP growth to persist in 2016 with growth rate projected to be around 2% 2. Nevertheless, with the Federal Government of Nigeria s proposed ambitious expansionary 2016 budget of 6.1 trillion with special attention on investments in key infrastructure such as power, works and housing to reflate the economy, we anticipate that growth will pick up in the medium to long term. In spite of the challenging macroeconomic environment, the Company s performance in terms of units of properties sold remained almost at par at 137 units in 2015 relative to prior year s (2014: 140 units). However, in the year ended 31 December 2015, the fall in UPDC s revenue was attributed mainly to the non-recognition of some properties pre-sold as well as the James Pinnock Development which could not be recognised as income due to the fact the project is now being executed under a joint venture arrangement. Consequently, Agusto & Co expects an improvement in the Company s revenue in 2016 when these sales are accounted for in UPDC s books. However, this will only translate to improvement in profitability in the short term contingent upon the Company s ability to efficiently manage operational and financing costs. Given the Issuer s five-year strategic plan to have a strong footprint in the commercial real estate market, the Company plans to rebalance its portfolio from the current 80:20 ratio (residential vs. commercial) to a balanced ratio of 50:50 in the medium term. This is already evidenced in the successful completion of the Festival Mall in Festac in the last quarter of 2015, the planned development of a shopping mall in Kaduna and three additional malls being proposed for the Lagos market in the near term. In addition, UPDC is committed to remaining an active player in the residential segment with projects such as the Pinnacle Apartments (Abuja), Olive Court (Ibadan), Pineville (Asaba), Golf Estate Summit Hills (Calabar), James Pinnock Place, The Residences and Alexander Miller (all in Lagos) at various stages of development. To further boost the working capital position, the Company plans to recapitalise by way of rights issue which is estimated to realise about 5.6 billion. The rights issue is expected to be finalised in the second quarter of In addition, UPDC has decided to offer some of the assets currently being held as investment properties for sale in the second quarter of 2016 and this is projected to generate approximately 2.7 billion. In the medium term, the Company intends to sell off an additional 21.5% stake in the REIT to bring its holdings in the REIT to 40%. This is expected to generate additional 6.5 billion in cash. UPDC has also taken the strategic decision to position the Golden Tulip Festac Hotel to be a notable destination of choice for conferencing and banqueting events with the eventual plan to exit the investment (the hotel business) in National Bureau of Statistics 2 Agusto & Co Research 12

13 In our opinion, the Company s working capital and leverage would improve in the event of the successful consummation of the aforementioned initiatives particularly the proposed additional equity injection through the rights issue. The Company intends to issue Series 1 CP amounting to 16.8 billion as the first tranche under the 24 Billion Commercial Paper Programme in 2016 to refinance existing short term borrowings. The 183 days CP, which will be issued at a market-reflective discounted price, is redeemable at maturity at a par value of 16.8 billion. In our opinion, the Issuer has the capacity to meet the obligations on the Commercial Paper from its operating cash flow in a timely manner. The Issue is further enhanced by the 46% partial corporate guarantee from UAC of Nigeria Plc as well as the 10 billion Liquidity Support Facility which is to be jointly provided by both FBN Merchant Bank Limited and Coronation Merchant Bank Limited. Based on the aforementioned, we attach a stable outlook to the Issue. 13

14 FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT 31-Dec Dec Dec-13 '000 '000 '000 ASSETS IDLE CASH 54, % 58, % 18, % MARKETABLE SECURITIES & TIME DEPOSITS CASH & EQUIVALENTS 54, % 58, % 18, % FX PURCHASED FOR IMPORTS ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS STOCKS 12,195, % 9,742, % 12,707, % TRADE DEBTORS 1,686, % 2,097, % 998, % DUE FROM RELATED PARTIES 20,467, % 20,180, % 19,337, % OTHER DEBTORS & PREPAYMENTS 733, % 1,523, % 610, % TOTAL TRADING ASSETS 35,082, % 33,543, % 33,652, % INVESTMENT PROPERTIES 16,867, % 16,542, % 15,328, % OTHER NON-CURRENT INVESTMENTS 18,577, % 19,133, % 20,127, % PROPERTY, PLANT & EQUIPMENT 104, % 126, % 224, % SPARE PARTS, RETURNABLE CONTAINERS, ETC 17, % 15, % 16, % GOODWILL, INTANGIBLES & OTHER L T ASSETS 62, % 20, % - TOTAL LONG TERM ASSETS 35,629, % 35,839, % 35,697, % TOTAL ASSETS 70,766, % 69,441, % 69,368, % Growth 1.9% 0.1% -5.7% LIABILITIES & EQUITY SHORT TERM BORROWINGS 16,407, % 16,025, % 19,012, % CURRENT PORTION OF LONG TERM BORROWINGS LONG-TERM BORROWINGS 6,399, % 7,501, % 4,441, % TOTAL INTEREST BEARING LIABILITIES (TIBL) 22,806, % 23,527, % 23,454, % TRADE CREDITORS 2,775, % 1,143, % 3,411, % DUE TO RELATED PARTIES 6,967, % 2,490, % 1,260, % ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS 257, % 258, % 271, % OTHER CREDITORS AND ACCRUALS 1,459, % 2,707, % 2,428, % TAXATION PAYABLE 786, % 712, % 368, % DIVIDEND PAYABLE - - DEFERRED TAXATION 483, % 1,040, % 1,732, % RETIREMENT BENEFIT OBLIGATIONS MINORITY INTEREST REDEEMABLE PREFERENCE SHARES TOTAL NON-INTEREST BEARING LIABILITIES 12,728, % 8,352, % 9,474, % TOTAL LIABILITIES 35,534, % 31,879, % 32,928, % SHARE CAPITAL 859, % 859, % 687, % SHARE PREMIUM 3,943, % 3,943, % 4,115, % IRREDEEMABLE DEBENTURES - REVALUATION SURPLUS - OTHER NON-DISTRIBUTABLE RESERVES - REVENUE RESERVE 30,428, % 32,759, % 31,636, % SHAREHOLDERS' EQUITY 35,231, % 37,561, % 36,439, % TOTAL LIABILITIES & EQUITY 70,766, % 69,441, % 69,368, % 14

15 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR 31-Dec Dec Dec-13 ENDED '000 '000 '000 TURNOVER 3,738, % 10,081, % 9,328, % COST OF SALES (2,519,952) -67.4% (8,434,341) -83.7% (6,309,127) -67.6% GROSS PROFIT 1,218, % 1,646, % 3,019, % OTHER OPERATING EXPENSES (784,304) -21.0% (858,940) -8.5% (1,016,775) -10.9% OPERATING PROFIT 434, % 788, % 2,002, % OTHER INCOME/(EXPENSES) 440, % 3,905, % 4,390, % PROFIT BEFORE INTEREST & TAXATION 874, % 4,693, % 6,393, % INTEREST EXPENSE (2,670,625) -71.4% (2,657,289) -26.4% (2,014,157) -21.6% PROFIT BEFORE TAXATION (1,796,136) -48.0% 2,036, % 4,379, % TAX (EXPENSE) BENEFIT 324, % 48, % (552,112) -5.9% PROFIT AFTER TAXATION (1,471,222) -39.4% 2,084, % 3,826, % NON-RECURRING ITEMS (NET OF TAX) MINORITY INTERESTS IN GROUP PAT PROFIT AFTER TAX & MINORITY INTERESTS (1,471,222) -39.4% 2,084, % 3,826, % DIVIDEND (859,375) -23.0% (962,583) -9.5% (962,500) -10.3% PROFIT RETAINED FOR THE YEAR (2,330,597) -62.3% 1,122, % 2,864, % SCRIP ISSUES OTHER APPROPRIATIONS/ ADJUSTMENTS PROFIT RETAINED B/FWD 32,759,005 31,636,875 28,772,415 PROFIT RETAINED C/FWD 30,428,408 32,759,005 31,636,875 Proof ADDITIONAL INFORMATION 31-Dec Dec Dec-13 Staff costs ( '000) 532, , ,534 Average number of staff Staff costs per employee ( '000) 4,222 3,734 4,440 Staff costs/turnover 14.2% 4.9% 5.9% Capital expenditure ( '000) 23,517 58, ,800 Depreciation expense - current year ( '000) 44, ,332 51,028 (Profit)/Loss on sale of assets ( '000) Number of 50 kobo shares in issue at year end ('000) 1,718,750 1,718,750 1,375,000 Market value per share of 50 kobo (year end) ,900 Market capitalisation ( '000) 10,467,188 16,328,125 26,125,000 Market/Book value multiple Non-operating assets at balance sheet date ( '000) 18,577,221 19,133,856 20,127,550 Market value of tradeable assets ( '000) Revaluation date - Investment properties Revaluation date - Other properties Average age of depreciable assets (years) Sales at constant prices - base year 1985 ( '000) 17,472 51,633 51,573 Auditors EY PWC PWC Opinion CLEAN CLEAN CLEAN 15

16 CASH FLOW STATEMENT FOR Y/E 31-Dec Dec Dec-13 =N='000 =N='000 =N='000 OPERATING ACTIVITIES Profit after tax (1,471,222) 2,084,713 3,826,960 ADJUSTMENTS Interest expense 2,670,625 2,657,289 2,014,157 Minority interests in Group PAT Depreciation 44, ,332 51,028 (Profit)/Loss on sale of assets Other non-cash items 3 (1) Potential operating cash flow 1,244,216 4,859,337 5,892,144 INCREASE/(DECREASE) IN SPONTANEOUS FINANCING: Trade creditors 1,631,897 (2,267,959) (2,429,289) Due to related parties 4,476,763 1,229, ,857 Advance payments and deposits from customers (1,565) (13,245) (2,593,714) Other creditors & accruals (1,248,164) 278, ,662 Taxation payable 73, ,952 (381,692) Deferred taxation (556,795) (692,934) 6,624 Obligations under unfunded pension schemes - - (168,703) Minority interest Cash from (used by) spontaneous financing 4,375,983 (1,122,264) (3,784,255) (INCREASE)/DECREASE IN WORKING ASSETS: FX purchased for imports Advance payments and deposits to suppliers Stocks (2,453,041) 2,964,877 3,669,186 Trade debtors 410,902 (1,099,397) 1,021,621 Due from related parties (287,383) (842,864) (1,606,859) Other debtors & prepayments 790,307 (913,201) 1,912,634 Cash from (used by) working assets (1,539,214) 109,414 4,996,582 CASH FROM (USED IN) OPERATING ACTIVITIES 4,080,985 3,846,487 7,104,471 RETURNS TO PROVIDERS OF FINANCING Interest paid (2,670,625) (2,657,289) (2,014,157) Dividend paid (859,375) (962,583) (962,500) CASH USED IN PROVIDING RETURNS ON FINANCING (3,530,000) (3,619,872) (2,976,657) OPERATING CASH FLOW AFTER PAYMENTS TO PROVIDERS OF FINANCING 550, ,615 4,127,814 NON-RECURRING ACTIVITIES Non-recurring items (net of tax) CASH FROM (USED IN) NON-RECURRING ACTIVITIES INVESTING ACTIVITIES Capital expenditure (23,517) (58,432) (103,800) Sale of assets ,697 41,304 Purchase of other long term assets (net) (239,109) (770,961) Sale of other long term assets (net) 187, CASH FROM (USED IN) INVESTING ACTIVITIES 164,995 (258,844) (833,457) FINANCING ACTIVITIES Increase/(Decrease) in short term borrowings 381,621 (2,987,193) 3,142,551 Increase/(Decrease) in long term borrowings (1,102,290) 3,060,199 (6,444,913) Proceeds of shares issued - (0) - CASH FROM (USED IN) FINANCING ACTIVITIES (720,669) 73,006 (3,302,362) CHANGE IN CASH INC/(DEC) (4,689) 40,777 (8,005) OPENING CASH & MARKETABLE SECURITIES 58,858 18,081 26,086 CLOSING CASH & MARKETABLE SECURITIES 54,169 58,858 18,081 16

17 STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31-Dec Dec Dec-13 '000 '000 '000 Operating cash flow (OCF) 4,080,985 3,846,487 7,104,471 Less: Returns to providers of finance (3,530,000) (3,619,872) (2,976,657) OCF after returns to providers of finance 550, ,615 4,127,814 Non-recurring items Free cash flow 550, ,615 4,127,814 Investing activities 164,995 (258,844) (833,457) Financing activities (720,669) 73,006 (3,302,362) Change in cash (4,689) 40,777 (8,005) PROFITABILITY PBT as % of Turnover -48% 20% 47% Return on average equity (pre-tax) -5% 6% 13% Real sales growth -66.2% 0.1% -20.4% CASH FLOW Interest cover (times) Principal payback (years) WORKING CAPITAL Working capital need (days) 2,353 1,000 1,133 Working capital deficiency (days) 1, LEVERAGE Interest bearing debt to Equity 65% 63% 64% Total debt to Equity 101% 85% 90% 17

18 COMMERCIAL PAPER RATING DEFINITIONS S1 Commercial Paper rated `S1' are judged to offer HIGHEST safety of timely payment of interest and principal. S2 S3 Investment Grade Commercial Paper rated 'S2' are judged to offer VERY HIGH safety of timely payment of interest and principal. Commercial Paper rated `S3' are judged to offer HIGH safety of timely payment of interest and principal; however, changes in circumstances can adversely affect such issues more than those in the higher rated categories. S4 Commercial Paper rated `S4' are judged to offer ADEQUATE safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rated categories. SP5 SP6 D Speculative Grade Commercial Paper rated `SP5' are judged to carry INADEQUATE safety of timely payment of interest and principal; while they are less susceptible to default than other speculative grade instruments in the immediate future, the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments. Commercial Paper rated `SP6' are judged to be SUSCEPTIBLE to default; while currently interest and principal payments are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. Commercial Paper rated `D' are in PAYMENT DEFAULT and in arrears of interest or principal payments or are expected to default on maturity. Such instruments are extremely speculative and returns from these CP may be realized only on reorganisation or liquidation. 18

19 ISSUER RATING DEFINITIONS Aaa This is the highest rating category. It indicates a company with impeccable financial condition and overwhelming ability to meet obligations as and when they fall due. Aa This is a company that possesses very strong financial condition and very strong capacity to meet obligations as and when they fall due. However, the risk factors are somewhat higher than for Aaa obligors. A This is a company with good financial condition and strong capacity to repay obligations on a timely basis. Bbb This refers to companies with satisfactory financial condition and adequate capacity to meet obligations as and when they fall due. Bb This refers to companies with satisfactory financial condition but capacity to meet obligations as and when they fall due may be contingent upon refinancing. The company may have one or more major weakness (es). B This refers to a company that has weak financial condition and capacity to meet obligations in a timely manner is contingent on refinancing. C This refers to an obligor with very weak financial condition and weak capacity to meet obligations in a timely manner. D In default. Rating Category Modifiers A "+" (plus) or "-" (minus) sign may be assigned to ratings from Aa to C to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus) sign. 19

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