UAC of Nigeria: Topline growth and improved margins drive underlying earnings growth in Q3

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UAC of Nigeria PLC announced its unaudited results for the third quarter and nine months ended 30 September 2020.

Group Performance and Financial Review: Q3 2020

Revenue in Q3 2020 increased 10.5% to ₦21.2 billion from ₦19.2 billion in Q3 2019 as a result of revenue growth across all operating segments (Animal Feeds & Other Edibles +10%, Paints +18%, Packaged Food and Beverages +8%, and Quick Service Restaurants +16%).

Volume growth in the fish feed and cereals categories, as well as, price increases across major categories to offset rising raw material costs contributed to topline growth in the Animal Feeds & Other Edibles segment. Paints sales rebounded strongly following the easing of COVID-19 related restrictions, growing 18% compared to the same quarter last year as a result of strong volume growth across the portfolio.

UAC of Nigeria: Topline growth and improved margins drive underlying earnings growth in Q3

The Packaged Food and Beverages segment achieved growth in key categories i.e snacks, dairy, and water. Quick Service Restaurants revenue growth was primarily driven by sales from recently launched company-owned restaurants.

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    Gross profit increased 20.1% YoY to ₦4.4 billion in Q3 2020, with gross margin increasing 167 bps to 20.8%. Margin expansion was largely on account of price increases and increased sales of higher-margin categories in the Animal Feeds & Other Edibles segment.

EBIT declined 23.7% to ₦1.2 billion in Q3 2020, however, adjusting for non-recurring and non-operating income in Q3 2019 (profit from the sale of non-core real estate +₦631.3 million and writeback of statute-barred unclaimed dividend +₦206.3 million), underlying EBIT increased 65.1% YoY and EBIT margin increased 186bps to 5.6%. A key contributor to the improvement in underlying EBIT was the 642.5% YoY increase in Animal Feeds & Other Edibles operating profit in Q3 2020.

Underlying Profit Before Tax in Q3 2020 increased 34.0% YoY to ₦1.4 billion. Profit after Tax from continuing operations rose to ₦1.2 billion, up 8.1% YoY against ₦1.1 billion in Q3 2019. A ₦493 million loss from discontinued operations was recognised in Q3 2020 attributable to UPDC versus the ₦14.0 billion loss recorded in Q3 2019.

As a result, UAC’s Total profit for the period was ₦743 million in Q3 2020, a reversal from the ₦12.9 billion loss reported in Q3 2019. Earnings per share for the period was 15 kobo, up from negative 274 kobo in Q3 2019.

Free Cash Flow for the period was ₦1.1 billion in Q3 2020, compared with negative ₦15.8 billion in Q3 2019.Cash flow improvement in the quarter was primarily attributable to efforts to optimise working capital.

Commenting on the performance, Group Managing Director, Folasope Aiyesimoju, stated:

“Our strategy to invest for growth yielded encouraging results in the third quarter with consolidated revenues, gross profit and operating profit (excluding non-recurring items) growing 11%, 20% and 65% respectively. We recorded topline growth across all our continued operations in the quarter.

We are focused on strategies to mitigate the impact of a challenging foreign exchange environment and managing the recent trend of cost escalation. We expect to complete the sale of a controlling interest in UACN Property Development Company PLC to Custodian Investment PLC and are supportive of the recently announced merger between Chemical and Allied Products PLC and Portland Paints and Products Nigeria PLC.”

Revenue in 9M 2020 increased 1.7% YoY to ₦57.8 billion supported by sales growth in the Animal Feeds & Other Edibles segment (+3.6% YoY) which was considered an essential service during restrictions to the movement of people and goods to curtail the spread of COVID-19.

Gross profit in 9M 2020 declined 2.3% YoY to ₦11.4 billion as a result of limited sales during the strictest phase of the lockdown (April and May), higher input costs, and distribution expenses.

Adjusting for MDS, which has been re-classified as an associate, gross profit increased by 2.5% YoY. The adjusted gross profit margin was 14 bps higher in 9M 2020 at 19.7%.

EBIT was ₦2.0 billion in 9M 2020 compared to ₦4.5 billion in the previous year. Adjusting for non-recurring income from the sale of non-core real estate assets (₦631 million) and the writeback of statute-barred unclaimed dividend (₦206 million), underlying 9M 2020 EBIT declined 45.5% YoY, impacted by reduced sales in April and May, input cost escalation partly attributable to foreign exchange devaluation, supply chain disruptions, and rising employee costs on account of initiatives to strengthen management teams across the Group.

Underlying Profit before Tax was 52.1% lower YoY at ₦2.5 billion in 9M 2020 on account of lower operating profit and the steep decline in net finance income (-76.7% YoY) because of lower investment income yields compared to the prior year.

Profit after Tax from continuing operations was ₦1.5 billion, down 67.0% YoY against ₦4.4 billion in 9M 2019. Total profit for the period was ₦1.9 billion in 9M 2020, a reversal from the ₦10.3 billion loss reported in 9M 2019. Earnings per share for 9M 2020 was 47 kobo, up from negative 213 kobo in 9M 2019.

Free Cash Flow for the period was ₦1.3 billion in 9M 2020, compared with negative ₦5.2 billion in FY 2019. Free cash flow in 9M 2020 improved significantly on +₦4.7 billion net cash flow generated from operations driven by increased sales and improved working capital management. Free cash flow was also impacted by higher net capital expenditure YoY (+107% increase to ₦3.4 billion in 9M 2019) from investments in production capacity and cold chain distribution for the Packaged Food and Beverages segment.

Annualised Return on Equity (ROE) from continuing operations at the end of September 2020 was 3.5%, up from negative 17.2% as at the same period last year. Annualised Return on Invested Capital (ROIC) was 192bps lower at 2.4% (4.3% in 9M 2019).

On 3 August 2020, UAC entered into a binding agreement with Custodian Investment PLC regarding the acquisition of a 51% stake in UPDC. Custodian completed the acquisition of an initial 5.1% stake in UPDC in September 2020 reducing UAC’s stake in UPDC to 88.8%. Upon completion of the second tranche (45.9%), UAC will own a 43% stake in UPDC.

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