UACN: Our price target implies potential upside of 88% – FBNQuest

PT unchanged; 2016-17E EPS forecasts up 3%:  UAC of Nigeria’s (UACN) Q3 2016 results were quite encouraging following a run of very difficult quarters. The group posted sales and profit before tax (PBT) growth of 20 percent year-on-year (y/y) and 231 percent y/y to N20.9billionn and N2.4billionn respectively and were ahead of our estimates by 19percent and 28percent.

Sales for UACN’s food and beverage segment performed better than expected and were complemented by a positive surprise in UPDC’s (UACN’s real estate business) topline.

Strong growth for UACN’s animal feeds businesses, Grand Cereals and Livestock Feeds, was a key driver behind this topline growth. Grand Cereals posted a double digit sales growth (14percent y/y) for the first time since 2013 with PBT margin also improving by circa 600 basis points (bps) y/y to 11percent. Livestock Feeds now accounts for about 15 percent of group sales versus below 10 percent in 2014, aided by fish feeds sales in Lagos and the northern region.

Looking ahead, we expect a gross margin compression of around -130bps y/y in 2016E on the back of the weakening naira, and rising input and energy costs.

Benefits coming through from UACN’s strategy to optimise the price-volume mix across key consumer products are likely to be limited in 2016E.

As expected, profits from associates were down both on a y/y and quarter-on-quarter (q/q) basis. This is attributable to weaker demand for key commercial spaces as a result of the economic slowdown.

We do not see any material changes to the trend as market fundamentals are likely to remain unchanged/worsen.

Given the strong performance delivered in the food and beverage segment which accounts for about 50 percent of the group’s PBT, we have raised our Earnings Per Share (EPS) estimates for the 2016-17E period slightly, by 3percent.

Our price target (PT) of N30.3 is unchanged. Our price target implies a potential upside of 88percent. At current levels, UACN shares are trading on a 2016E P/E multiple of 10.2x for an average EPS growth of 13% in 2017E. Ytd, UACN shares have shed –22% compared with the broad market performance of -11.6%. We retain our Outperform rating.