• Wednesday, February 21, 2024
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UACN impairments on Hotel investments contribute to downswing in profit


UACN Plc’s impairments on hotel investments has contributed to a  downswing in half year profit as the leading conglomerates continues to grapple with the tough operating environment that makes it difficult for businesses to thrive.

For the first six months through June 2015, UACN’s net income dipped by 70 percent to N1.03 billion from N3.48 billion the previous year. Sales were down 7 percent to N37.37 billion as declining discretionary consumer spending continues to dampen the top lines of subsidiaries.

“The company’s numbers came in weaker than expected primarily due to top line weakness across key business lines and an impairment charge in its real estate business,” said Uwadiae Osadiaye, equity research analysts with FBN Capital, an investment firm in a note to BusinessDay.

“After discussions with management, we can conclude that management decided it was necessary to take this hit as occupancy levels in its primary hotel investment have consistently missed targets due to externalities,” said Osadiaye.

Real estate in Africa largest economy has been declining on the back of   pressured consumer wallets stoked by rising inflation and hike in transportation. This means a lot of people are not buying houses.

Nigeria’s consumer inflation rose by 0.2 percentage points to 9.2 percent in June compared with the same month last year, its highest rate since February 2013 and above the central bank’s targeted upper limit.

An industry analyst who doesn’t want his name mentioned said real estate and mortgagebusiness also flattered due to the high interest rate that makes housing and mortgage inaccessible to people.

The Central Bank of Nigeria (CBN) has increased the interest rate to 13 percent from 12 percent previously as it said the policy will curb inflation and protect the naira from a continued fall as a result of a 50 percent dip in the price of oil.

Crude oil accounts for 75 percent of government revenue and over 90 percent of foreign exchange earnings.

UACN’s distribution/administrative expenses were down by 31 percent to N7.25 billion in June 2015 as against N5.37 billion last year as bad roads, high energy costs at offices continues to spiral up distribution/administrative and other expenses.

The company is also spending more to produce each unit of products as operating expense ratio increased to 19.40 percent in June 2015 compared with 8.64 percent as at June 2014.

While operating expenses are rising, the company controlled production costs given a 7 percent fall in cost of sales to N28.98 billion in June 2015 from N31.08 billion the previous year.

Gross profits were down by 8.5 percent to N8.39 billion in the period under review as against N9.17 billion last year. Gross profit margins remained flattish at 22.45 percent.

Analysts say the peaceful elections the appointment of housing minister will give the current administration a policy direction that will pursue a solid blueprint for the housing and real estate sector.

For instance, the introduction of the Mortgage Refinancing Corporation by the administration of former president Goodluck Ebele Jonathan has been lying fallow. The policy is expected to give further boost to mortgage business in Africa largest oil producer.

Nonetheless, there are opportunities in the Nigeria economy as industry expert say the rapid urbanization and the rising population means the demand for housing will spike in the near future.

According to the United Nations (UN) the country’s rapid rate of urbanisation stands at 51 percent, this means 86.70 million people are drifting from the rural areas to the urban cities in search of white collar jobs.

It isn’t the real estate segment of UACN’s business that is receiving a one or two punch as a result of the doldrums; its food departments suffered a setback due to uncertainties.

“Given new bird flu outbreaks and the present lull in economic activities we do not believe a strong recovery is likely this year, he added.

UACN’s total assets increased by 3.04 percent to N134.32 billion in June 2015 from N130.35 billion the preceding year. Current ratio was 1.21x, which is less than the 2.1x industry average. The return on average equity (ROE) was 1.40 percent in the review period.

“We estimate y/y declines of around 7% and 39% in sales and EPS during the second half of 2015. Our views are premised on continued topline weakness and higher y/y costs across the business. UACN’s real estate business ambitions are likely to lead to a capital raise within the next few months as the firm intends to focus on the retail and commercial end of the real estate market as well as deleverage its balance sheet, said analysts at First Bank Capital.

The company’s share price closed at N37 on the floor of the exchange while market capitalization was N71.02 billion.