Like Nigeria, UACN, the country’s oldest conglomerate is looking like a company in need some makeover. At first glance, UACN’s 2017 financial performance looks good. UAC 2017 revenue was the highest in four years (since 2014).
But a deeper look shows that there is not much to cheer. Even though UAC revenue surged eight percent from N82.6 billion in 2016 to N89.18 billion in 2017, profit for the year shrank 83 percent to N962.8 million in 2017 from N5.67 billion in 2016.
Profit shrank partly because there are indications that the company’s gross margins are under pressure despite rising sales. Gross profit margins (the difference between revenues and the cost of goods a company sells),have declined consistently from 22.4 percent in 2014 to 17.9 percent in 2017 respectively.This could be a sign that the company is not able to transfer increasing cost of production to its customers which is not surprising considering that household incomes have come under pressure.
But net margins have even shrunk more, declining to just one percent in 2017 compared to 6.9 percent in 2016, an indication that the company is not doing too well at keeping a cap on other costs. In a difficult operating environment where inflation has been rising consistently until the last two months,analysts are beginning to ask questions if UAC should be taking a second look at its conglomerate model and get out of non-profitable lines.
The UACN group consists of the five subsidiaries including; Food and Beverage – Made up of business units involved in the manufacturing and sale of food items, livestock feeds, bottled water, fruit juices, ice-cream and quick service restaurants as well as its real estate subsidiary.
A further investigation into the 2017 financial books of UAC Nigeria showed the food and beverages subsidiary of UAC Nigeria is the biggest revenue driver for the group revenue (N89.1 billion), as it contributes 80 percent with a revenue of N71.5 billion which is a 11 .54 percent increase compare to its revenue of N64 billion in 2016.
Also in 2017, the Paints subsidiary had the second highest revenue as it contributed 11 percent of group revenue. The paints subsidiary revenue stood at N9.4 billion which is a 7.6 percent growth compared to its 2016 revenue of N8.7 billion. Paints subsidiary is made up of business units involved in the manufacturing and sale of paints products and other decorative.
The Logistics subsidiary contributes just 5 percent to the group revenue with revenue of N4.1 billion in 2017 which is an 11.6 percent decline compared to its 2016 revenue of N4.6 billion. Logistics is made up of a business unit involved in rendering logistics and supply chain services including warehousing, transportation and redistribution services.
Then there is the Real Estate subsidiary, which is beginning to look like the problem child in the group. The real estate contributed just four percent of group revenue, recording turnover of N3.8 billion which represents a 19.77 percent decline compared to its 2016 revenue of N4.8 billion. Real Estate is made up of a business unit involved in development and management of real estate.
The once profitable property subsidiary of UAC is now beginning to look like a drag on the group’s operations. A look into the financial books of UAC Nigeria showed there was a finance cost of N6.2 billion in 2017 largely related to the operations of from UACN Property Development Company (UPDC) Plc. Analysts’ familiar with the stock believe that the major challenge facing the UAC is its UAC Property Development Company (UPDC).
“The main problem with UAC is UAC properties, a stockbroker said. Stressing that UAC property as a subsidiary is not doing well at all,” a market analyst told BusinessDay. UPDC made a loss of N2.947 billion in 2017.
UPDC was also in the red in 2016 with a loss of N1.551 billion, which it attributed to recognition of losses on certain projects and impairment of investments in one joint venture project, foreign exchange losses and negative performance of its hotel asset.
In first quarter of 2018, the situation has not improved, UPDC recorded a 61 percent decrease in revenue to N600 million compared to N1.56 billion recorded in the comparative period. Also in the same period, the company recorded a net loss of N900 million compared to N1.19 billion loss for 2017.
Bello is already moving to stop UPDC from becoming a drag on the company’s operations. He has disclosed that management is working on the deconsolidation of UAC Property development company (UPDC) from the group. It is not clear of this would mean selling down part of its 64% stakes in the company.
But analyst at Lagos-based cardinal stone, an equity research institute said they view the move as a positive development as it eliminates the risk of earnings volatility from UPDC’s operations on the group; as earnings have been stifled, largely due to the consolidation of operating losses from its property segment.
“Whilst UPDC’s revenue appears to have rebounded, we believe the outlook for the real estate sector (particularly the luxury end) remains soft. Also with seemingly bright prospects for the other segments (especially food and beverage), we expect the group to remain profitable into the future with the exclusion of UPDC,” Analyst at Cardinal Stone said.
Bello also announced in April that UAC plans to raise $65.4 million this year through a bond sale to refinance short term borrowings in its real estate subsidiary.
This will reduce the pressure from high cost bank loans on its books.
Bello says that the major challenge facing UPDC is a current oversupply of high end properties in the market coupled with a weakening of the purchasing power of Nigerians. He told an analysts’ call that the harsh economic conditions were still affecting the housing market and that sales at UPDC fell 20 percent in 2017.
“We would use 2018 to refinance a short-term facility as we intend to have this business restructured; we see long-term growth supported by a huge housing deficit,” Bello said.
That growth potential now looks far away and Bello is probably thinking that it is better to have UPDC off its books for now, until the property market picks up again.
UAC Nigeria is one of Nigeria’s biggest players in the consumer goods space.
The company has remained a foremost and active participant in Nigeria’s economic landscape since 1879, following the merger of four trading companies namely, Alexander Miller Brother & Company, Central African Trading Company Limited, West African Company Limited and James Pinnock.
Abdul Bello, who just resumed as managing director/CEO in January, started his career in the copmpany when he joined Grand Cereals Limited (GCL), a subsidiary of UAC Nigeria PLC (UACN) in October 1989 as Chief Accountant. Prior to joining UACN, he started as Management Trainee in Inlaks PLC in August 1984. He was Chief Accountant of Inlaks PLC, Lagos from January 1987 to September 1989.
Abdul has held various management positions across UACN Group. Between August 1997 and February 1998, he was Senior Accountant at Accounts Headquarters, UACN PLC. He was appointed Finance Director & Company Secretary of Chemical & Allied Products (CAP) PLC on 1st April 1998. He was appointed the Managing Director of CAP PLC on 1st February 2003 and later appointed Managing Director of UPDC PLC on 1st November 2007.
UAC Nigeria Plc is also one of Nigeria’s biggest players in the consumer goods space, listed in the Nigeria Stock Exchange (NSE) with a market capitalisation of N43.3 billion. Investors will be watching closely to see if restructuring its business portfolio, UAC could once more become the darling of investors that it was once was.
DIPO OLADEHINDE & ABISINUOLA DAVID-OLUSA
