UACN: From profit drop into N2b loss

UAC of Nigeria Plc [UACN] looks quite likely to report worse earnings performance for its 2022 operations than the 33 percent profit drop in 2021. Pressured by rising costs and loss of margins, the conglomerate slipped further into a loss of N2 billion at the end of the third quarter (Q3) last September.

The company’s Q3 interim financial report at the end of September 2022 shows loss of margins from top to the bottom, which caused a plunge from an after-tax profit of N563 million in the same period in 2021 to a net loss of over N2 billion.

Operating pressure intensified in Q3 — which accounted for N1.3 billion or 65 percent of the loss. Sales revenue slowed down at an increase of 3.6 percent quarter-on-quarter in Q3 to N25.8 billion due to lower volume and with cost increases, an operating loss of ₦852 million was incurred in the quarter.

Loss of sales is expected to sustain in the final quarter, indicating that the company’s loss figure could swell at full year, as the down side forces persist.

Fola Aiyesimoju, UACN’s group managing director, attributed the loss to margin pressure, high levels of debt and inventory and rising borrowing costs, particularly in the animal feeds segment, where a loss of N1.9 billion occurred.

The company’s animal feed segment — its largest revenue provider — lost the strength to deliver profit in the course of last year. The segment recorded an operating loss of ₦1.7 billion at the end of Q3, down from an operating profit of ₦1.7 billion in the same period in 2021. The company’s report said this was on account of lower sales volume, higher raw materials and conversion costs and increased operating expenses.

Aiyesimoju blames rising levels of insecurity and recent flooding in the South East of the country for disrupted operations in the animal feeds segment.

Loss of margins runs all the way from the top to the bottom with gross profit margin down by 148 bps to N15.8 percent, operating profit margin down by 158 bps to 16.3 percent and EBIT margin diving by 215 bps to 1 percent on year-on-year reading at the end of September 2022.

Net profit margin sank into negative of 2.6 percent, down from positive 0.8 percent over the same period.

UACN closed the Q3 trading with sales revenue of N77.8 billion, which is a year-on-year increase of 9 percent. Animal feeds segment is one of the under-performing segments on revenue growth with an increase of 3.9 percent year-on-year.

The segment still dominated revenue at 58.8 percent at the end of Q3, declining however from 61.3 percent in the same period in the preceding financial year.

The paints segment was the company’s sales revenue growth driver in the year with a year-on-year growth of 28 percent to N13 billion at the end of September. It is also the profit leader with 128.8 percent advance in pre-tax profit to N13 billion that helped to prune down the overall loss figure.

Cost of sales grew at a faster pace than sales revenue at 11 percent year-on-year to N65.5 billion at the end of Q3 compared to the 9 percent improvement in sales. The increased incursion of input cost into sales revenue weakened gross profit, which declined slightly to N12.3 billion at the end of Q3.

Rising input cost intensified in Q3 when gross profit dropped by 16.2 percent quarter-on-quarter to N3.4 billion for the quarter.

The same pattern of increase is also recorded in respect of selling and distribution expenses, which consumed revenue at an increase of 36.4 percent year-on-year to N6.2 billion at the end of September 2022.

The third quarter accounted for much of the increase in selling and distribution cost at an increase of 61.4 percent to N2.4 billion for the quarter.

Operating profit thinned down from N2.2 billion in the same period in 2021 to N758 million at the end of Q3.

The position was compounded by a drop of 20.6 percent in finance income to N731 million and an upsurge of 120 percent in finance expenses to N2.5 billion over the review period. The result is a jump of more than seven and half times in net finance cost to over N1.8 billion at the end of Q3.

The company’s balance sheet borrowings, including lease liabilities, were in excess of N30.4 billion at the end of the third quarter.

UACN closed Q3 operations with a pre-tax tax loss of N1 billion, which was extended to a net loss of N2 billion by tax expenses and loss from discontinued operations.

The full year outlook for the company indicates a further loss in the final quarter, reflecting a mix of slowing sales and rising costs constricting margins.