UAC Nigeria Plc Nigeria Equities Conglomerate New acquisitions bolster revenue growth Strategic acquisition drives sales growth. In the nine months September 2013, UACN recorded 27.2% y/y growth in sales revenue to N60.47billion from N47.53billion posted in 2012. The company s sales revenue performance in the review period is higher than our estimate (N58.94billion) by 2.6%. The increase in the revenue was lifted by the performance of the newly acquired subsidiaries - Livestock Feeds and Portland Paints - which became members of the group in 2013. Both companies contributed N6.30billion to the group s revenue in the review period. On a quarterly basis, the company reported sales revenue of N22.76billion in 3Q2013, i.e. 24.4% above the N18.30billion posted in 2Q2013 and 33.7% higher than the N17.02billion recorded in 3Q2012. As a result, the revenue level achieved in 3Q2013 is the highest over the last 14 quarters. Higher growth in input cost impacts gross profit. In 9M 2013, UACN recorded a 32.4% y/y increase in cost of sales (COS) to N46.25billion compared with N34.93billion posted in the same period of 2012. This resulted in an increase in COS/sales revenue ratio to 76.5% from 73.5% in 2012; hence, gross profit moved up to N14.23billion from N12.60billion in 9M 2012, i.e. an increase of 12.9% y/y compared with 27.2% y/y growth in 2012. On a quarterly basis, the company recorded COS of N18.10billion in 3Q2013, which is 39.6% and 38.7% higher than N12.96billion and N13.05billion reported in 2Q2013 and 3Q2012 respectively. Similarly, operating expenses (opex) moved up by 23.0% y/y to N7.44billion in 9M 2013 relative to N6.05billion recorded in 2012. The lower y/y growth in opex compared to the movement in sales revenue resulted in opex/sales ratio of 12.3% (9M2012: 12.7%). However, total overhead increased by 31.0% y/y to N53.69billion against N40.98billion in 2012. This resulted in total overhead/sales ratio of 88.8% in 9M 2013 from 86.2% in the same period of 2012. Moses Ojo mojo@dunnlorenmerrifield.com Price: - Current N67.00 * - Target N74.67 Recommendation: BUY * As at Thursday, November 7, 2013 Fig. 2: Stock data FYE Fig. 5: Unilever vs. NSE, 52-wk movement (rebased) December Price Mov t: YtD / 52wk +91.43%/+98.52% 52-week range 33.33-69.15 Average daily vol./val. 743,652 /N41.876mn Shares Outstanding (N mn) 1,921 Market Cap. (N mn) 128,698 ($804mn) EPS, N 4.70 DPS, N 1.60 FCF, N -0.76 Source: Bloomberg, Company s Annual Reports, DLM Research Fig. 3: Key ratios 9M 2013 19M 2012 Gross profit margin 23.52% 26.51% Net profit margin 16.68% 14.49% Equity multiplier 1.80x 2.32x Asset turnover 0.50x 0.36x Fig. 4: Valuations P/Sales 1.91x 1.59x 1.42x 1.29x P/E 15.58x 14.41x 13.17x 12.91x PEG 0.14 1.77 1.40 6.66 EV/EBITDA 1.83x 1.79x 1.57x 1.43x P/B 1.83x 2.09x 1.98x 1.89x ROE 11.72% 14.48% 15.06% 14.61% ROA 5.78% 7.11% 7.49% 7.45% Div. Yield 2.31% 2.31% 2.60% 2.60% Fig. 1: Quarterly results Highlights 3Q2013 2Q2013 3Q2012 Q/q Δ Y/y Δ Sales revenue (N mn) 22,761 18,303 17,021 24.36% 33.72% Operating profit (N mn) 4,177 3,666 2,742 13.94% 52.33% After-tax profit (N mn) 2,407 2,127 1,773 13.16% 35.76% Please read the Important Disclosures at the end of this report.
Fig. 6: Sales revenue 9M 2013 Fig. 7: Sales revenue 9M 2012 Fig. 8: Quarterly sales revenue (N bn) Fig. 9 Annual sales revenue (N bn) Source: NSE, Company Financials, DLM Increase in other operating income lifted earnings significantly. As at September 2013, UACN s other operating income increased by 863.0% y/y to N3.30billion relative to N343million reported in 2012. Consequently, the company posted net profit of N5.73billion, i.e. 46.5% above the N3.91billion recorded in the 2012. The other operating income comprises profit on sale of subsidiaries UAC Registrar, profit on transfer of UPDC REIT properties, net gains on disposal of investment properties, and rental income. However, we are inclined to highlight that some of these revenue sources are not expected to re-occur subsequently. 2
Interest expense increased in spite of reduction in borrowings. For 9M 2013, UACN recorded interest expense of N2.31billion, a y/y increase of 22.1% relative to N1.89billion posted in the same period of 2012 despite a reduction of N1billion in long term borrowings to N14.07billion. On the other hand, the company s short term borrowings increased by 4.5% y/y to N15.93billion in 9M 2013. In our view, the increase in the interest expense is a result of higher lending rate within the domestic economy given the prevailing monetary policy stance. Fig. 10: Quarterly COS/sales revenue ratio Fig. 11: Quarterly opex/sales revenue ratio Fig. 12: Profit margins 3
Valuation methodology Our Valuation puts the revised target price of the stock of UACN at N74.67 per share. In arriving at the target price, we employed multiples of price-toearnings, price-to-sales, price-to-book, and EV-to-sales. We also employed the DDM valuation methodology. Consequently, we maintain our BUY recommendation on the stock of UAC Nigeria Plc. Our revised valuation and estimates took into consideration the challenging operating environment in Nigeria generally and the specific challenges confronting manufacturing sectors, the macroeconomic and demographic factors of the country, the expected effects of the recent strategic initiatives embarked upon by the company, and the strength of competition in the market. 4
Fig. 13: Statement of Profit or Loss, N mn Revenue 69,632 83,690 93,733 103,106 Change 20.19% 12.00% 10.00% Cost of sales 50,583 60,759 67,488 74,236 Change 20.12% 11.07% 10.00% Gross profit 19,049 22,931 26,245 28,870 Change 20.38% 14.45% 10.00% Other operating income 171 3,303 1,982 1,387 Change 1,831.58% -40.00% -30.00% Operating expenses 7,695 10,294 11,529 13,198 Change 33.77% 12.00% 14.47% Operating profit 11,525 15,940 16,698 17,059 Change 38.31% 4.75% 2.17% Interest income 1,752 1,010 1,212 1,200 Change -42.35% 20.00% -1.00% Interest expenses 2,532 3,000 2,850 2,907 change 18.48% -5.00% 2.00% Profit before tax 10,745 13,950 15,060 15,352 change 29.83% 7.95% 1.94% Income tax expense 3,642 4,729 4,970 5,066 change 29.85% 5.09% 1.94% Profit for the year 7,103 9,221 10,090 10,286 change 29.82% 9.42% 1.94% Fig. 14: Statement of Financial Position, N mn FY2013 FY2014E FY2015F FY2016F Non-Current Assets Property, plant & equipment 34,624 36,009 38,169 43,132 Intangible assets 65 59 53 47 Other non-current assets 34,572 37,338 41,146 44,438 Total non-current assets 69,261 73,405 79,368 87,617 Y Current Assets Inventories 28,484 29,054 28,182 27,900 Trade & other receivables 11,834 11,716 11,247 12,147 Cash & cash equivalents 13,397 15,443 15,887 10,433 Total Current assets 53,715 56,212 55,316 50,480 Total assets 122,976 129,618 134,684 138,097 Equity 60,601 63,675 66,991 70,405 Non-Current Liabilities Deferred taxation 3,486 3,556 3,947 4,353 Loans and borrowings 15,019 14,100 14,100 14,100 Total non-current fin. liab. 18,505 17,656 18,047 18,453 Current Liabilities Trade & other payables 23,543 24,485 25,219 24,715 Current tax liabilities 3,041 4,729 4,970 5,066 Dividend payable 2,039 3,074 3,458 3,458 Short-term borrowings 15,247 16,000 16,000 16,000 Total current liabilities 43,870 48,287 49,647 49,239 Total equity and liabilities 122,976 129,618 134,685 138,097 Fig. 16: DuPont Analysis Total assets turnover 0.92x 1.08x 1.16x 1.22x Operating profit margin 16.55% 19.05% 17.81% 16.55% Equity multiplier 2.03x 2.04x 2.01x 1.96x ROCE 15.24% 20.50% 20.59% 20.19% Fig. 17: Efficiency ratios Fixed assets turnover 1.01x 1.14x 1.18x 1.18x Current assets turnover 1.30x 1.49x 1.69x 2.04x Total assets turnover 0.92x 1.08x 1.16x 1.22x Inventory turnover 2.05x 2.11x 2.36x 2.65x Receivables turnover 10.51x 13.68x 14.73x 15.00x Payables turnover 11.22x 11.62x 12.15x 12.71x Days inventory outstanding 178 173 155 138 Days collection outstanding 35 27 25 24 Days payable outstanding 33 31 30 29 Operating cycle (days) 180 168 150 133 Fig. 18: Liquidity ratios Working capital (N millions) 9,845 7,925 5,669 1,241 Current ratio 1.22 1.16 1.11 1.03 Quick ratio 0.58 0.56 0.55 0.46 Cash ratio 0.31 0.32 0.32 0.21 Fig. 19: Long-term solvency & stability ratios Gearing 19.86% 18.13% 17.39% 16.69% Equity multiplier 2.03x 2.04x 2.01x 1.96x Total debt-to-equity 1.03x 1.04x 1.01x 0.96x Total debt-to-assets 50.72% 50.88% 50.26% 49.02% Proprietary 49.28% 49.13% 49.74% 50.98% Interest coverage 4.55x 5.31x 5.86x 5.87x Cash coverage 3.72x 2.51x 2.73x 2.49x Fig. 20: Shareholders investment ratios EPS, N 4.44 4.80 5.25 5.35 DPS, N 1.60 1.60 1.80 1.80 Payout 36.04% 33.33% 34.27% 33.62% FCFPS, N 2.47 3.21 2.92 2.64 Source: Company s annual reports, DLM Research Fig. 15: Profitability & return Gross profit margin 27.36% 27.40% 28.00% 28.00% Operating profit margin 16.55% 19.05% 17.81% 16.55% Net profit margin 10.20% 11.02% 10.76% 9.98% ROCE 15.24% 20.50% 20.59% 20.19% ROE 11.72% 14.48% 15.06% 14.61% ROA 5.78% 7.11% 7.49% 7.45% Source: Company s annual reports, DLM Research 5
Equity research methodology employed in this report Views documented in this equity research report stem from conclusions reached through the use of multiple valuation methodologies, industry-wide knowledge, company specific information and our near to medium term expectations of industry and company performance, as well as market outlook. Our forecasts are based on a combination of top down and bottom up analysis, alongside historical trends in industry and company financials. Where appropriate, we factored in available forecasts and business direction provided by company management. This equity research report qualifies as an initiation research report on the company whose stock has been analysed, hence the level and depth of details documented herein. Further updates on this company, or its stock, or both, will be communicated to investors via brief research notes or earnings-flash emails, as occasion demands. Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge a customized scale we use to judge how well a firm under coverage has performed is determined using major value parameters as well as relevant ratios and multiples computed with figures from the company s most recent financials. The investment rank or grade given to a company is an alphabet which falls in the set {A+, A, B, C+, C, D, E, F}, where Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a strongly positive performance outlook. Grade A means the company s performance is of high quality, but can be made better. Outlook for the company is positive. Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts. Outlook is weakly positive. Grade C+ means the company s performance is exactly average; outlook is neither positive nor negative. Grades C and D indicate that dwindling performance is the company s fate at the current time. Outlook for the company is mildly negative. Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going concern. Outlook for the company in this case is alarmingly negative. The variables used to arrive at the company s investment rank cover a wide range of measures which characterize liquidity, operational efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital structure and management performance. Our investment recommendation is underpinned by the upside or downside potential of a stock under coverage. This potential is estimated by comparing the stock s current market price to its price target and fair value, on a percentage increase or decrease basis as summarized below: Deviation from current price Recommendation >30% STRONG BUY 10% to < 30% BUY -10% to < 10% HOLD <-10% SELL Source: Company Financials, DLM Research In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks way below their fair values, while income investors might purchase stocks at their fair values at the very maximum. Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors might be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock s upside or downside potential. A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors time and capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and if you have bought it, do not sell it. 6
IMPORTANT DISCLOSURES. This research report has been prepared by the analyst(s), whose name(s) appear on the front page of this document, to provide background information about the issues which are the subject matter of this report. It is given for informational purposes only. Each analyst hereby certifies that with respect to the issues discussed herein, all the views expressed in this document are his or her own and reflect his or her personal views about any and all of such matters. These views are not necessarily held or shared by Dunn Loren Merrifield Limited or any of its affiliate companies ( DL Merrifield ). The analyst(s) views herein are expressed in good faith and every effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or completeness. The opinions and information contained in this report are subject to change and neither the analysts nor DL Merrifield is under any obligation to notify you or make public any announcement with respect to such change. This report is produced independently of DL Merrifield and the recommendations (if any), forecasts, opinions, estimates, expectations and views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable, none of the analysts, DL Merrifield nor any of its directors, officers or employees has verified the contents hereof and accordingly, none of the analysts, DL Merrifield nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. With the exception of information regarding DL Merrifield, reports prepared by DL Merrifield analysts are based on public information. Facts and views presented in this report have not been reviewed and may not reflect information known to professionals on other DL Merrifield business areas including investment banking. This report does not provide individually tailored investment advice. Reports are prepared without regard to individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. It is recommended that investors independently evaluate particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances or objectives. Neither the analyst(s), DL Merrifield, any of its respective directors, officers nor employees accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each analyst and/or any person connected with any analyst may have acted upon or used the information herein contained, or the research or analysis on which it is based prior to its publication date. This document may not be relied upon by any of its recipients or any other person in making investment decisions. Each research analyst certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific recommendations (if any), opinions, forecasts, estimates or views in this report. Analysts compensation is based upon activities and services intended to benefit clients of DL Merrifield. As with other employees of DL Merrifield, analysts compensation is impacted by the overall profitability of DL Merrifield, which includes revenues from all business areas of DL Merrifield. DL Merrifield does and seeks to do business with companies/governments covered in its research reports including market making, trading, risk arbitrage and investment banking. As result, investors should be aware that DL Merrifield may have a conflict of interest that could affect the objectivity of this report. DUNN LOREN MERRIFIELD Elephant House 214 Broad Street, Lagos, Nigeria Bloomberg: < DLMN> Tel: 234 GO 1 462 2683-4