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Company analysis: UAC of Nigeria Plc (UACN)

by RUCHI GUPTA

June 3, 2013 | 4:00 pm
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Company Description

UAC of Nigeria Plc (UACN) is a leading diversified conglomerate. UACN was incorporated in 1931 with its headquarters in Lagos, Nigeria, under the name Nigerian Motors Ltd. The existing name, United Africa Company was adopted in 1943. The company has a diversified business portfolio with primary focus on Foods, Real Estate, Paints, Logistics, Manufacturing and Auto. The different subsidiaries of the company are: UACN Property Development Company Plc (UPDC), Warm Spring Waters Nigeria Ltd. UACN also holds majority stake in Grand Cereals and Oil Mills Ltd (GCOML) and Spring Waters Nigeria Ltd (SWAN). It also has stake in Chemical & Allied Products. The company has joint ventures with General Motors, MDS Logistics and UACN Registrars Ltd.

Investment Summary

Diversified Product Portfolio: UAC of Nigeria PLC (UACN) is one of the leading food companies in Nigeria. The company operates in diversified sectors spread across logistics and warehousing, real estate, and automobile. The products offered by the company include food & beverages, snacks, ice creams, bottled water, edible oils, cereals, vital feed range, paints and so on. The bouquet brands offered by UAC are Gala sausage rolls, Snaps, Supreme Ice-creams, Delite fruit juices, Warm Spring Waters, Grand Cereals, Dulux paints among others. UAC is a leader in the quick service restaurant segment with its chain of restaurants called “Mr. Biggs”. In addition, the company’s presence in the segment was boosted by inclusion of franchised international food brands like Creamy Inn, Dial-A-Delivery, Nando’s, Chicken Inn, and Pizza Inn. Another feather on the cap is UAC’s UPDC, the first real estate company to be listed on Nigerian Stock Exchange (NSE). Diversification and experience which spans across a century keeps the company cushioned against adverse economic environment.

Strong Distribution Network: UACN operates through MDS Plc Logistics providing supply chain solutions to its customers. MDS sits on a robust network of 50 distribution centers spread across 31 states in Nigeria. It covers a catchment area spanned over more than 600 cities and villages. MDS has diversified base of customers ranging from food & beverages, chemical, telecom and pharmaceutical giants. Its multi-user resources’ interface creates economies of scale. It aids in cost optimization to its customers. UAC has a history of expanding through inorganic growth. Of late, Imperial Holdings, a South-Africa based logistics firm bought 49.0% stake in MDS for a value of $27.0 million. The strategic alliance is expected to bring international exposure and technical expertise in its wake.

Dividends of Restructuring: In its existence of 133 years, UACN has evolved into a manufacturing conglomerate through a string of mergers & acquisitions and restructurings from its humble beginning as a marketing firm. It latest decision to spin-off non-core businesses and form international strategic alliances is expected to pay-off well. In its pursuit to enhance sustainable growth and transform business, it sold 49.0% stake to South African retail giant, Tiger Brands Ltd in 2011. The company has signed Memorandum of Understanding (MoU) with Portland Paints and Products Plc and Livestock Feeds to acquire majority stake in them. In 2013, it sold 49.0% stake in MDS to another South African logistics giant Imperial Holdings. These strategic alliances are expected to bring efficiencies and enhance growth prospects for the company.

Management Guidance

Revenue: 

FY2012 shaped up into a good year for UACN both operationally and strategically. Net revenues, increased 16.8% Y/Y to N69.6 billion in FY2012 compared to $59.6illion in FY2011. Revenue increased primarily driven by robust performance of foods’ business and UACN’s subsidiaries UPDC and Cap Plc. In addition, Grand Cereals Ltd grew to N12.04 billion in FY2012 driven by increased occupancy levels at UPDC Hotel. MDS recorded a growth of 20.0% Y/Y to N4.04 billion in net sales in FY2012. Overall, Food & beverage, Real Estate, Logistics and Paints business segments accounted for ~98.0% of the total revenues in FY2012.

Margins: 

The company’s COGS (as a % of revenues) though decreased 76bps Y/Y to 72.6% in FY2012 on the back of cost containment initiatives adopted by the company; however, remains a concern in the near-term. UACN has implemented a new procurement strategy for its real estate business and improved inventory management for its paints and chemicals unit. This pushed up gross profit margin 76bps to 27.4% in FY2012 compared to 26.6% in FY2011. Administrative expenses claimed a lower portion of sales on a yearly basis, declining substantially to 8.9% in FY2012 compared to 13.0% in FY2011 due to alliance with Tiger Brands and adoption of full franchise restaurant business model. This led to an expansion of operating margin by 362bps Y/Y to 16.6% in FY2012. Net profit margin saw a healthy jump of 492bps Y/Y to 5.9% in FY2012 primarily because of lowered tax rate compared to FY2011.

Balance Sheet & Liquidity: 

Cash & cash equivalents decreased 12.2% to N13.4 billion in FY2012 from N15.3 billion in FY2011 as the company registered larger outflows in investing and financing activities during the year. On the other hand, the company recorded positive CFOs due to substantial increase in net income. Total assets increased 1.1% Y/Y to ~N123.0 billion in FY2012 driven by increased investment properties. Debt burden reduced to N30.3 billion in FY2012 versus N33.9 billion in FY2011 mostly because of reduced leverage in Grand Cereals following the rights issue, pulling the Debt/Equity ratio down to 0.5x.

Dividends: 

UACN has a history of rewarding its shareholders and it pays dividends regularly. The company declared dividend of N1.60 per share in FY2012 and the trend is expected to continue.

Financial Summary

Increased import duty: 

Nigeria is one of the largest importers of wheat in the world and imported wheat amounts to 97.5% of the total consumption of wheat in a year. It spends a total of N635 billion on wheat importation. From July 1, 2012, the Federal Government increased import duty on wheat grains to 20.0 per cent and wheat flour to 100.0 per cent. This initiative of the government is to achieve 40 per cent cassava flour input in to bread produced and consumed in Nigeria. This move of Federal Government drove bread prices up by 10.0% to N220 compared to N180 – N200 earlier. Increased duty & levy on wheat import resulted in price increase by flour millers and bakers. The new development is expected to raise the prices of spaghetti, noodles, pasta and pastries where wheat flour forms 90% of the raw material. In addition, given the rise of food grain prices in later half of 2012, it is expected that the prices are to go further higher up adding to the woes of UACN.

Increased competition: Big flour milling companies forayed into the fast food segment with offerings like noodles and pastas. From 2006 to 2012, five flour mills namely; Dangote Flour Mill, Flour Mills Nigeria, Honeywell Flour Mills, Crown Flour Mills, and BUA floated their noodles and pasta brands. Growing at a CAGR of 22.0% over the five years, Nigeria has become the 13th largest noodle market in the world. It is estimated to reach N47.0 billion by 2021. The pasta market though larger in value terms have lagged behind, growing at a CAGR of 15.0% over the last five years and is expected to total N55.0 billion by 2021. The pasta market is led by Dangote Pasta Ltd.

External elements: The new traffic law of The Lagos State Government (LASG) states that eating while driving is prohibited and is a punishable offence. Gala, the flagship brand of UACN is expected to be adversely impacted by the new law as street sales contribute significantly to its total sales. Other external factors which impact the performance of the company are weather conditions not only locally but also globally. As unfavorable weather conditions might impact agricultural growth which indirectly would hit the input costs and hinder operations.

Opportunities

The company has re-engineered and restructured itself by spinning off its non-core businesses and focusing primarily on its foods business. In the long-term the company plans to concentrate on the highest potential segments of the foods industry and emerge as a food focused conglomerate. With Food and Beverage dominating the manufacturing industry in Nigeria, UACN prospects remain strong in near term as well as long term periods. The expanding middle class and growing working-age population creates huge demand for consumer goods. Moreover, the industry enjoys a low demand elasticity which implies that in difficult economic times also the food industry sail through fairly steady. In addition, larger exposure and greater awareness towards healthy and branded foods is also expected to contribute to the rising demand of consumer food products.

UACN and Livestock Feeds Plc

UACN increased its stake to 51.0% in 2012 from 11.0% in Livestock Feeds Plc (LFP), becoming a majority stakeholder in the company. The transaction size totaled to N1.3 billion. The company proposes to utilize the proceeds of the transaction in two parts: 40.0% for working capital and 60.0% for technical capacity upgrade. UACN already has majority stake in Nigeria’s second largest livestock feed companies, Grand Cereal Limited (GCL). The latest acquisition of UACN totals its market share in the livestock business to 32.0%, up from 24.0% earlier. This acquisition was part of the larger strategy of the company to invest and consolidated its holdings in the highest potential segments of the market whereas to divest or spin-off the weaker businesses it has been operating in. The livestock feeds market has been growing at a CAGR of 10.0% over the recent period, in line with the overall consumer goods industry. The segment is expected to continue with the trend. Federal Government lifted the ban on import of corns in 2008; however, poultry producers still shy away from importing corn. They fear that strong corn-producers using their political networking would thwart their businesses. Thus, the demand is met through domestic produce creating immense demand for the locally-produced livestock feed.

Livestock Feeds Plc also provides the much needed geographical diversification to UACN. UACN through its wholly-owned subsidiary GCL is more prominent in the Northern part of Nigeria in the Jos, Plateau State. On the other hand, LFP dominates the southern zone barring its feed mill located in Kaduna. Given the recent instability and insurgency in the Northern state, this acquisition offers an ideal strategic fit.

Comparing the financials of the two companies, GCL and LFP, it could be said that the acquisition should bring about efficiency gains as LFP’s net sales for 2011 accounted for 15.0% of GCL’s revenues for the same period; however, profit before tax(PBT) of LFP accounted for only 5.0% of GCL’s PBT. Other areas of potential synergistic advantages are expansion in supply chain and distribution network.

Divestment in MDS Logistics

UACN, as part of its restructuring drive, divested 49.0% stake in its wholly-owned subsidiary MDS. In May this year, UACN sold 49.0% of its stake to a South African based logistics giant Imperial Holdings. The spin-off came on the back of the need for international exposure and experience. This alliance is expected to bring in its wake international expertise and technological advantage. The management of MDS believes that it is the right time for a strategic partnership to tap the under-penetrated, potential Nigerian logistics market. Imperial Holdings, a part of Imperial Group spans across the continent of Africa and some parts of Europe. Thus, complements MDS business to provide end to end logistics solutions.

Majority stake in Portland Paints:

In July 2011, UACN bought majority stake (60.0%) in Portland Paints Plc, a leader in standard mainstream paint manufacturing industry. CAP Plc, the existing subsidiary of UACN is a leader in the premium paint segment. The two companies would operate separately in their different segments. The acquisition is expected to boost the company’s paint business no sooner it get the requisite regulatory approval. The company plans to conclude the acquisition by second quarter of the current year. Presently, Paints contributes 8.0% to the total sales of UACN.

Conclusion:

Given the current developments and reforms, the company is expected to outperform its local peers in the medium term. The company is trying to translate the same formula to its other businesses which it achieved with the strategic alliance of UAC Foods and Tiger Brands. This offers huge opportunity on the back of strategic partnerships in its Food, Paints and Property businesses. UACN is expected to register strong growth in net sales driven by expected expansion in its food business and new product offerings.

On the flip side, the company is expected to face headwinds from the struggling economy, insecurity in the Northern region and delay in launch of its REIT property business. In addition, after achieving the full franchise model, revenues from restaurant business is projected to go down near-term as the company would be receiving only franchise royalty revenues.

Going Forward

Operational Performance:

Revenues in FY2013 are expected to grow in double digits though at a slower pace compared to FY2012 driven by the core segments of Foods & Beverage, Real Estate and Paints. UACN registered a decline in COGS in FY2012 due to the cost containment initiatives implemented by the company. However, sustainability of COGS at the current levels (as % of revenue) remains a concern. In 1Q2013,  the company witnessed an increase of 7.8% to 78.3% and we believe COGS are to rise though not at the same pace. The increase comes on the back of rising wheat prices and increased import duties on both wheat grain and wheat flour. Gross margin is estimated to go down. On the other hand, Administrative, Selling & Distribution expenses comes as a breather. They are expected to remain flat due to the successful alliance with Tiger Brands and adoption of full franchise restaurant business model to retain the efficiency gains registered in FY2012. However, operating margin is expected to plummet due to higher COGS.

Financial expenses are expected to go down due to conclusion of the approval for REIT to finance UPDC’s operations by 2Q2013. Financial income is expected to plunge due to reduced cash levels. Income tax rate is expected to remain flat at statutory levels. However, net profit margin is expected to tank due to decreased growth rate of net sales and increased COGS.

Cash Flow Analysis:

The liquidity position of the company is expected to go down yet remain comfortable in FY2013. The reduced cash levels are projected to bring down current assets, thus, pulling down the current ratio a tad from the existing ratio of 1.2x in FY2012. Building up of the investment properties’ inventory (calculated as an average of previous years) is expected to weigh on cash levels in the near-term. Dividend per share is expected to remain stable at current levels due to stressed cash flows.

Industry Outlook

The economy is plagued by decelerating GDP growth, pegged at 6.75% for 2013, high unemployment rates, decreasing purchasing power of consumers and rising security issues. Nigeria is expected to witness a high average inflation rate of 9.8% during 2013. Inflationary pressures which saw a downturn in 2011 surged up again in January 2012 due to removal of the Petrol Motor Spirit subsidy. According to NBS, the major drivers of inflation were food and beverage industry, real estate, power and water. Inflation levels are expected to remain elevated following the economy’s over dependence on imports particularly in the foods sector coupled with the impact of government spending.

The demand in the foods industry is a direct function of population of an economy and the rising population of Nigeria is expected to work in favor of the foods industry. The total population of Nigeria is expected to rise to 170 million by 2013 from 160 million in 2006. Further, the youth population and expanding middle class are the potential revenue drivers for branded consumer food products. In addition, the increasing awareness in the healthcare sector is set to drive demand for new products and high-end goods. The Food & Beverage industry reached an estimated N1.0 trillion in 2012. The food & beverage industry has grown more than 60.0% in the last five years due to the fact that people purchase food and drink irrespective of the condition of the economy as these are counted as essentials.

Flour milling industry which is an intrinsic part of the food supply chain is estimated to have reached N340.0 billion in 2012. 80.0% of the flour milled domestically is consumed in the manufacturing of bread and the remaining 20.0% is utilized by fast foods like noodles, pasta, pastries and biscuits. Though the demand has grown continuously over the years; however, the profiles of its clients have changed drastically from household consumers to industrial in the likes of fast food restaurants, commercial bakeries, and noodles & pasta companies. The flour milling industry in Nigeria remains the largest compared to the rest of West Africa, followed by Ghana. The industry is expected to continue the uptrend riding on the back of increasing demand from the foods industry. On the flip side, the rising prices of wheat and the increased import duty on wheat is taxing on flour millers.

In the longer term; however, the dependence on imported wheat is expected to go down given the government’s initiatives to re-enforce the 10.0% cassava inclusion policy. Further, the government proposes to implement regulations where 60.0% of wheat and 40.0% of cassava would be used to produce flour. The government plans to establish 18 cassava processing plants across the nation to reduce dependence on foreign nations.

The food & beverage industry remains crippled by the poor infrastructure of the economy. Pitiable electricity, deplorable roads and poor connectivity adds to the operating costs of manufacturers. Self powered electricity through generators cause the overhead expenditure to go up by as much as 20.0% to 25.0% for manufacturing companies. 80.0% of roads in Nigeria are in deplorable state according to African Development Bank. This poses challenges for companies to transport finished goods from factories to market, and raw materials to factories.

Real Estate Sector

Nigeria is a country with a landmass of 970,000 square kilometers and an estimated population of 170 million by 2013. However, the third most essential need (after food and clothing), housing remains largely neglected in Nigeria thwarted with legal challenges in the absence of laws favoring investors in the sector.

Housing investments accounts for 15.0% to 35.0% in other counterpart economies compared to a meager 0.4% in Nigeria. Multi-million value in naira terms waits to be freed from the existing National Housing Stock given the easing of the home titling laws. Due to inadequate land titling laws, investors shy away from the property market. Property laws in Nigeria are not only anti-business they tend to be long-drawn-out, unwieldy and complex.

In addition, lack of support from the part of the government adds to the sector’s woes. The government needs to work in tandem with the private sector to see rapid development in the real estate sector. On the contrary, lack of implementation in physical terms in the first quarter of the current year led to further slowdown in the sector. Though the government did announce its plans to fasten up the process of launching the Nigerian Mortgage Finance Corporation to facilitate improved credit to realty developers, financers, and agents yet gauging the current scenario it seems a far cry. This agency would ensure not only easy and safe finance to the sector but also provide access to minimum 30.0% of the urban Nigerians to materialize their dreams of owning a house.

The Vision 20:2020 National Technical Group plan states that building of one million houses annually for the next 10 years would add 10 million additional houses to the national housing stock, making the sector amongst the top 3 contributors to the economy. The distribution of the new houses should be equally spanned across rural and urban centers.

Rapid urbanization in Nigeria with close to 50.0% of the population living in urban areas versus a meager 38.0% in 1993 and even lesser at 10.0% in 1952 shows the untapped real estate market. More than 80.0% of the population lives in informal residential housing.

Industry experts claim that Nigerian real estate sector has the capability to witness exponential growth in coming years if the REIT (Real Estate Investment Trust) framework is promoted to thrive. According to them, Africa’s real estate’s assets accounts for a paltry EUR113.0 billion (N22.6 trillion) or approximately 1.0% of the globe’s total value, whereas, the population of the continent represents a humongous 15.0% of the world’s total population. UPDC’s initiative to launch a N30.0 billion REIT is laudable.

The sector witnessed a growth of 11.1% in the fourth quarter of 2012 and an average growth rate of 10.4% for the year 2012. Real Estate combined with Building and Construction outgrew the average non-oil growth of 7.9% for the year 2012. However, five non-oil sectors’ annual growth rate for 2012 was higher than real estate sector’s growth rate during the same period.

 

 

Gupta is senior analyst, BusinessDay Research and Intelligence Unit.


by RUCHI GUPTA

June 3, 2013 | 4:00 pm
  |     |     |   Start Conversation

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