Conglomerate

UAC of Nigeria (UACN) is a leading conglomerate, operating in the food and beverages, real estate, paints and logistics sectors. UACN’s business portfolio includes UACN Property Development Company (UPDC); UAC Foods, a joint venture with Tiger Brands; MDS Logistics, which has investments in the development of pharmaceutical distribution hubs in key locations across the country; UAC Restaurants, a joint venture with Famous Brands; Chemical and Allied Products (CAP); Grand Cereals, a leader in animal feeds and edible oils; Warm Spring Waters Nigeria; and UNICO CPFA, a closed pension fund administrator. The firm’s business expansion drive led to the 2013 acquisition of a 51% share in Livestock Feeds and Portland Paints and Products Nigeria.

Financial Performance 

In the first quarter of 2016, while sales were flat year-on-year (y-o-y), profits before tax (PBT) and after-tax profits declined by 23% and 19%, respectively. The food and beverages segment still accounts for the largest proportion of sales, at around 77%. A y-o-y gross margin contraction of 121 basis points to 22.4%, an 18% y-o-y rise in net finance charges and, to a lesser extent, a 4% y-o-y rise in operating expenses (opex) led to the PBT decline during the quarter. This was primarily driven by the poor performance of UPDC, which posted a loss before tax of N125m ($395,000). CAP, UACN’s core paint business, reported after-tax profits decline of 13% y-o-y to N422m ($1.3m). However, CAP’s top line was resilient, up 2% y-o-y at N1.9bn ($6m). Its gross margin contracted by around 500 basis points to 49%, which was largely due to issues related to foreign exchange (FX) and increased production costs.

UACN’s sales, PBT and after-tax profits all declined quarter-on-quarter (q-o-q) by 6%, 65% and 67%, respectively. A q-o-q gross margin contraction of 217 basis points and a 120% q-o-q rise in net finance charges offset positive results in profits from associates. While sales surpassed Bloomberg Research’s expectations of N16.1bn ($50.8m) by 9%, PBT came in 18% behind largely because of declines on both the opex and finance cost lines. However, after-tax profits were in line with Bloomberg’s estimates due to UACN’s tax rate of 25.3%, compared to the estimated 35%. In terms of strong segments, sales for UACN, excluding paints and real estate, were up 4% y-o-y at N15bn ($47.4m) in the first quarter of 2016. However, this was partially offset by a 53% y-o-y decline in sales at UPDC to N684m ($2.2m) while sales for CAP came in relatively flat compared to the previous year.

Development Strategy

UACN’s key growth strategies are to improve operational efficiencies and boost existing operations by forming business-enhancing partnerships for its various subsidiaries. Recently, there have been notable joint-venture agreements for both UAC Foods and UAC Restaurants. In Nigeria consumer purchasing power has been hurt by a combination of headwinds such as the naira devaluation and a higher inflationary environment. As such, innovation is now a priority for UACN through the introduction of new products in key categories and increased local sourcing of raw materials to reduce FX requirements. The firm is also keen to improve on the capital structure of key businesses. UPDC is highly leveraged with a gearing ratio of 0.64 as of year-end 2015. While a planned equity capital raise for the group has been shelved on the back of a weak market, rights issues for subsidiaries are expected to proceed. The firm has stated that UACN will utilise internally generated funds to subscribe to subsidiary rights issues. A commercial paper programme for UPDC of N24bn ($75.8m) is already under way. In April 2016 the firm successfully raised N15.9bn ($50.2m) in commercial paper at 11% per annum to refinance existing positions. Going forward, UPDC’s property portfolio is expected to shift from the high-end residential market to commercial and retail, which should mean growth across Nigeria.

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