UAC Nigeria may close with another profit drop

UAC Nigeria is likely to experience another profit collapse in its 2018 operations with a chance of kissing the red. A turnaround outlook that saw an after tax profit of N1.32 billion at half year has faded, slashing the profit figure to N252 million at the end of the third quarter in September 2018.

The conglomerate had closed half year trading on a dicey note – whether a big turnaround would happen or the turnaround force would lose its momentum. Declining sales revenue combined with relatively huge finance expenses undermined the company’s turnaround process in the third quarter.

In the preceding financial year, the company recorded a profit drop of 83% to N963 million. The disappointing performance in the third quarter has raised the prospects for another major profit drop, as the earnings reporting season approaches.

There is however a major improvement in cash flow position with positive cash generations all the way from operating activities to financing operations. The big impacts came from N16 billion cash injection by shareholders through a rights issue and close to N5 billion proceeds from sale of investment properties.

One of the company’s major drawbacks remains the inability to grow sales and this has been the challenge for management over the past several years. At the close of the group’s operations in September 2018, sales revenue continued to drop. At N55.76 billion, turnover was down by 18.3% year-on-year. With seasonal sales, turnover may close in the region of N77 billion for UAC Nigeria for 2018. The company closed 2017 operations with sales revenue of N89.2 billion.

Another major drawback is huge finance expenses that stood at more than twice the operating profit at the end of the third quarter. Despite a drop of 17%, finance cost remains large at N3.71 billion. Whether the improvement in cash flow position will be sufficient to enable full deleveraging of the balance sheet remains to be seen.

Input cost continued to moderate, dropping by close to 21% – ahead of the 18% drop in sales revenue. That helped to wage the effect of dropping sales on gross profit – which declined by 7.5% to N10.73 billion over the review period.

The performance of other operating income continued to disappoint at a drop of 57% year-on-year to N1.18 billion at the end of September. Further pressures came from a 160% upsurge in other operating losses to N1.62 billion as well as selling/distribution and administrative expenses. The result was a 70% drop in operating profit to N1.7 billion – well below the half year figure of N2.72 billion in June.

Some respite continues to come from finance income, which grew by 53% to over N2 billion during the review period. That was reinforced by the drop in finance expenses, leading to a drop of 47% in net finance cost to N1.66 billion over the period. This was still relatively large enough to wipe off operating profit. The company’s pre-tax profit of N447 million at the end of the third quarter came from share of profit of associates.

The group closed the third quarter trading with an after tax profit of N252 million, a drop of 87% year-on-year. With balance sheet debts remaining huge at over N21 billion, finance expenses could make fresh incursions into revenue in the final quarter and the chance of a bottom line in the red is considered high at full year.

As much as N242 million of the after tax profit belongs to non-controlling interests and N10 million is all that shareholders of the parent company can lay claim to as at the end of September. This is a sharp drop from N736 million at the end of June.

Earnings per share fell from 31 kobo in the same period in 2017 to 1 kobo at the end of the third quarter. The group earned 50 kobo per share at the end of the 2017 financial year and paid out N1 per share to shareholders in cash dividend.