• Friday, March 29, 2024
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BusinessDay

Can Nigeria’s oldest conglomerate bounce back from problem-child woes as new challenges emerge?

Nigerian property market

Investors and shareholders in Nigeria’s oldest conglomerate UACN will be keen to see management turn around the company, not only because its “problem child” UACN Property Development Company (UPDC) plc is still struggling but also because new challenges are emerging.

Not only was it the DNA of early Nigeria, the company was also once the most innovative and forward-looking business in Nigeria, but it is now a shadow of itself as it incurred a N9.4 billion loss after tax compared to 2017 profit after tax of N1.3 billion, while also recording an operating loss of N5.3 billion compared to operating profit of N7 billion in 2017.

The UACN Group consists of five subsidiaries including food and beverage made up of business units involved in the manufacturing and sale of food items, livestock feeds, bottled water, fruit juices, ice-cream and quick service restaurants, as well as its real estate subsidiary.
Where the problem lies

Revenue from real estate continued to under-perform in 2018 contributing just 2.7 percent to group revenue compared to 3.8 percent recorded in 2017. Real estate revenue also nosedived by 43 percent to N2.2 billion in 2018, from N3.9 billion in 2017, amid challenging market conditions.

“On the back of lower housing inventory sales and collections amid challenging market conditions, we estimate that average occupancy rate has fallen to 45-47 percent, from 55-60 percent pre-2014 oil price slump,” analysts at CSL Stockbrokers Ltd, an arm of First City Monument Bank, said.

Revenue from its animal feeds business was underwhelming in 2018, contributing just 20 percent to 2018 group revenue compared to 63 percent in 2017.
Revenue from animal feeds business in 2018 was down 24 percent to N42.8 billion, from N56.3 billion in 2017.

“We attribute this to weaker sales as a result of intense competition, reduced bird population, higher input prices and loss of market share,” CSL Stockbrokers Ltd said in a note.

UACN’s EBITDA (which can be used to analyse and compare profitability among companies and industries as it eliminates the effects of financing and accounting decisions) was down 36 percent year on year to N4.4 billion in 2018, thanks to 12 percent year-on-year decline in revenue and further exacerbated by 5 percent rise in selling and distribution costs to N4.7 billion as well as marginal increase of 2 percent in administrative expenses to N7 billion.

EBITDA margin, an assessment of a firm’s operating profitability as a percentage of its total revenue, declined to 6 percent in 2018, from 8 percent in 2017.

Also, net margins have even shrunk more, declining to -8 percent compared to just one percent in 2017. It once stood at 6.9 percent in 2016, an indication that the company is not doing too well at keeping a cap on other costs.

Although net finance cost moderated downwards significantly by 54 percent to N2 billion compared to N4.3 billion in 2017, this positive was completely offset by the operating losses of N8.9 billion recorded in 2018.

The portion of UACN’s profit allocated to each share of common stock, earnings per share (EPS) declined to a negative of N2.11 in 2018 compared to N0.50 in 2017.
Drivers of the tumble

Things are really bad now for UACN. However, on Tuesday it’s scheduled to have an investors’ call on its 2018 results, the questions that will be on the lips of most analysts, investors, and shareholders will be: how soon can things get better?

UPDC’s results include N4.0 billion in impairments on assets held for sale and another N3.1 billion in impairment on joint ventures receivables.

Further analysis revealed that First Festival Mall reported a loss after tax of N260 million for the period ended 31 December, 2018. The share of the Group of this based on UPDC’s 45 percent shareholding is N117 million.

Recall that UACN has some Special Purpose Vehicles (SPVs) set up between UPDC and other parties (including land owners, private equity firms and other financiers) for real estate development. UPDC has equity contributions in First Festival Mall Limited, UPDC Metro City Limited and Transit Village as designated.

“The company had no commitment or contingent liabilities to the associate and joint ventures as at December 31, 2018, beyond the equity contributions held and outstanding working capital advances,” UACN said in its 2018 report.

Way out

In a difficult operating environment where inflation has been rising consistently until the last two months, analysts are beginning to ask if UAC should be taking a second look at its conglomerate model and get out of non-profitable lines.

Last month, the company appointed a seasoned professional with 17 years’ experience gained from diverse functional roles, covering finance, strategy, risk management, and corporate finance, Ibikunle Oriola, as its new Group finance director, while Abdul Bello resumed as managing director/CEO in January 2018.

Gbolahan Ologunro, an equity research analyst at Lagos-based investment firm, CSL Stockbrokers Ltd, said UACN is in a difficult situation where it doesn’t have much control over items and pricing decisions to make up for shortfall in revenue, while its market share in animal food business is also shrinking due to increasing competition.

“The outlook is not looking too positive, maybe a mild improvement in 2019 if the economy picks up,” Ologunro told BusinessDay.

Jerry Nnebue, a researcher at Lagos-based investment management firm, CardinalStone Research, said it would be too premature to give a way forward because UACN has given a rundown of what to expect which is yet to yield any result.

“Until we get a clear-cut strategy from management on what they want to do, it’s difficult to really speculate,” Nnebue told BusinessDay.

UAC Nigeria plc is one of Nigeria’s biggest players in the consumer goods space, listed in the Nigeria Stock Exchange (NSE) with a market capitalisation of N20 billion and trading at N7 per share as at Friday, April 12.

Investors will be watching closely to see if it will undertake a restructuring of its business portfolio, and once more become the darling of investors that it once was.

DIPO OLADEHINDE