Event

In its Q1 2022 financial performance, UAC of Nigeria (“UACN” or “the Group”) reported a 4% YoY decline in profit after tax to N642mn despite an impressive revenue growth of 26% YoY to N27.67bn and a 30% YoY increase in operating profit to N1.41bn.

Safeguarding Profitability Through Operating Efficiencies

In Q1 2022, manufacturing companies had to deal with a high inflationary environment. Manufacturers were also faced with supply chain disruptions and higher input cost highlighting the negative effects of the on-going political unrest across Eastern Europe. We believe this factored in the 25% YoY rise in cost of sales to N22.59bn (Q1 2021:  N18.01bn). Although, on account of effective pricing strategies by the Group, gross profit margin was maintained at 18% for Q1 2022.

Furthermore, the Group maintained a flat operating margin, despite a 25% YoY increase in operating expense. This was due to an effective transfer of cost burden to consumers during the period. Consequently, operating profit grew by 30% YoY to N1.41bn in Q1 2022 from N1.09bn Q1 2021.

Outlook

We expect higher sales volume to drive revenue growth in the medium to long term. This is against a backdrop of expected capacity expansions and growing investments across various operating segments. We also expect the Group to implement strategic pricing policies to support revenue growth and protect profit margins through sustained operating efficiencies.

We have a revised EPS of N0.92 (previous: N0.63) and maintained a dividend estimate of N0.65. Although, we estimated a growth in EPS, the higher finance cost resulting from significantly high level of debt, led to a downward revision of our fair value estimate to N7.30 (previously: N8.59).

At the current market price, the stock trades at a premium of 34% and offers a dividend yield of 6%. This sums up to a total negative return of 28%, hence we recommend a SELL.

Please follow the link “UACN Q1 2022 – High Finance Cost Stifles Bottomline Growth”  to view the whole report.