Event

UACN recently released its Q2 2022 financial earnings performance. The Group underperformed, as reflected in the 461% YoY decline in PBT to a N966mn loss in Q2 2022 from a N267.71mn profit in Q2 2021. Higher costs of raw materials and losses from the Animal Feeds and Edible oil segment affected the Group’s profitability.

Outlook

Clearly, higher operating costs – in the form of higher raw material costs and inflationary impact on operating expenses – weakened the operating performances of the Group’s businesses, particularly in the Animal Feeds segment. Notably, the global supply chain disruption and trend of higher prices in the global commodity markets precipitated the high raw material costs.

However, we expect the high raw material costs to normalise in the near term. According to the management, the Group ramped up inventories in Q4 2021 based on an expectation of further increases in raw material costs. However, that did not happen. Hence, the Group had to report a higher cost of sales. We also expect to see additional price increases on products. This is in view of the impact of heightened inflation on operating expenses. Therefore, the combination of higher prices and cost normalisation is expected to result in operating margin expansion in H2 2022.

In the medium term, the ongoing efforts to improve profitability include capacity expansion of Swan (bottled water), deepened route-to-market in the foods business, consolidation and additional expansion of market share in the Paints segment, and a total shift from a franchise model to a corporate-owned store model in the QSR segment.

In our view, we think that most of the Group’s businesses are fragile, particularly in Animal Feeds & Other Edibles which account for half of the Group’s overall revenue. Heightened competition and inconsistent trend of cost margins are the two major obstacles facing this business.

On the other hand, we are relatively optimistic about the growth prospects of the Paints and Foods segments. For context, although the Animal Feeds business generates the most revenue, the combined profits from the Paints and Food segments typically account for 65% of the Group’s overall profit.

We made a downward revision to our estimated fair value to N5.71 (previous: N7.30). The material decline in valuation stemmed from the impact of the weak Q2 2022 performance and lower growth expectations in subsequent quarters. We recommend a SELL.

Please follow the link “UACN Q2 2022 – Underwhelming Performance in Q2 2022”  to view the whole report.

Thank you.