United Africa Company of Nigeria Plc returns to profitability in Q3’20

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UAC of Nigeria Plc (UACN: TP: N8.26; c.5.9% upside to market) has reported a return to profitability in its recently released third-quarter earnings. However, passthrough from the second-quarter loss resulted in a 67.0% YoY plunge in profits from continuing operations to N1.5 billion over the first nine months of the year.

Highlights of the third-quarter results:
Revenue grew by 10.5% YoY to N21.2 billion, aided by growths across all operating segments (Animal Feeds & Other Edibles +10.0%; Paints +18.0%; Packaged Food and Beverages +8.0%; and Quick Service Restaurants +16.0%).

Management noted the positive impacts of volume growths in fish feed and cereals as well as price increases in a few categories on Animal Feeds & Other Edibles in the quarter.

Other notable growth drivers in the quarter included the lifting of COVID-19 restrictions (Paints) and the launch of company-owned restaurants (QSR)
Knock-on effect of price increases and a focus on higher-margin categories in the Animal Feeds & Other Edibles segment drove gross margin 1.7ppts higher YoY to 20.8%.

These higher-margin categories included oils and cereals such as cornflakes
However, operating profit margin declined by 2.5ppts YoY to 5.6% on the impact of the high base effect from Q3’19 that was stoked by one-off entries.

Specifically, the previous year’s numbers were flattered by the N631 million proceed from the sale of non-core real estate assets and writeback of a statute-barred unclaimed dividend of N206.3 million. Excluding these one-off entries, the operating profit margin would have been higher by 1.9ppts YoY

Overall, profit after tax from continuing operations rose by 8.2% YoY to N1.2 billion. There was however a 493 million loss from discontinued operations from UPDC (vs N14.0 billion loss in the corresponding period of 2019).

This loss from discontinued operations moderated total Q3’20 profit to N743 million

Other highlights:
Despite the Q3’20 recovery and potential festive-induced demand in the ongoing quarter, UACN looks on course to underperform our full-year profit forecast of N3.3 billion going by the contributions of the final quarter numbers in recent years
Nonetheless, the company’s increasing net cash position is supportive from a valuation standpoint. Cash position is also likely to be improved by the second tranche flows of the UPDC/Custodian deal. Net Debt to EBITDA ratio stood at negative 5.1x in 9M’20 compared to negative 2.2x in 9M’19

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