UACN: Operating pressure undermines profit capacity

UACN has grown profit every year in the preceding five years but the company looks set to fall from its previous profit highs in 2015. The second and third quarter operations of the conglomerate ended in losses, which lowered its profit from N1.68 billion in the first quarter to N963 million in the third. The company was already headed for a profit drop even by its first quarter growth rate and the second quarter loss has accelerated its pace towards the lowest profit figure in many years.

There is operating pressure from both sides of sales revenue and profit and the company’s diversified operation is no longer able to guarantee stable growth in revenue and profit. Declining revenue against rapidly rising operating expenses explains the company’s loss of considerable profit capacity in the 2015 financial year.

Sales revenue went down by close to 10% in the third quarter, as business activity remained generally subdued. The full year outlook indicates that sales revenue could drop by a wider margin of 14% for the year against an increase of 8.8% in 2014.

The critical factor that has undermined the company’s profit capacity is distribution/administrative cost, which rose by 29% against the 10% drop in sales revenue at the end of the third quarter. The company devoted 19% of sales revenue to this expenditure line compared to 13.2% in the same period in 2014.

After tax profit fell by 79% to N963 million year-on-year at the end of the third quarter, as net losses of N638 million and N75 million occurred in the second and third quarters respectively, cutting profit below the first quarter figure. Based on the growth rate in the third quarter, UACN may post just a small fraction of its preceding year’s profit figure for its 2015 operations.

The company closed third quarter trading with sales revenue of N54.60 billion, which increased the margin of drop from 7% in the second quarter to 10% in the third. Sales revenue is estimated at N74 billion for UACN in 2015, a likely drop of about 14% in the year. The company grew sales revenue by 8.8% to N85.65 billion in 2014 and has maintained consistent growth in turnover since 2011.

The drop in sales revenue was partly remedied by an improvement in other income in the third quarter. Against a drop of 37% in other income in the second quarter, there was an increase of 13% at the end of the third quarter – which helped to reduce the loss figure for the quarter. Share of profit from associates also improved from a drop of 18% in the second quarter to a slight decline of 2.8% in the third quarter.

Interest cost increased slightly by 3% in the third quarter compared with a drop of 31% year-on-year in the second quarter. This remains a good record relative to the huge adverse impact of finance charges on corporate earnings generally in 2015. The company reduced long-term borrowings by 16% to N6.65 billion in the third quarter but short-term debts went up by 15% to over N26 billion over the closing figures in 2014.

After tax profit amounted to N963 million at the end of the third quarter, a fall of 79.4% year-on-year and a further drop from the N1.68 billion the company posted in the first quarter. A loss of N638 million occurred in the second quarter, as cost of sales and distribution/administrative expenses grew well ahead of sales revenue. The loss figure reduced sharply to N75 million in the third quarter.

Based on the expectation that no further loss happens in the final quarter, after tax profit is estimated at N1.5 billion for UACN for the 2015 financial year. This will be a sharp drop of 86% from the peak profit of N10.73 billion the company reported at the end of 2014. This will be a lower profit figure than the company has reported any time in the past five years. The company grew after tax profit by 8.6% in 2014 and has grown profit every year since 2011 after a recovery from a drop in 2010.

The decline in revenue against increased costs eroded the company’s profit margin during the review period. Net profit margin continues to go down from 12.5% at the end of 2014 to 9.5% in the first quarter, 2.8% in the second quarter and further to 1.8% in the third.

The company earned 32 kobo per share at the end of the third quarter, a big drop from N1.34 in the same period in 2014. Earnings per share is expected to come to 78 kobo for UACN for the 2015 operations based on the full year estimated net profit attributable to owners of the company. That would be a sharp drop from the earnings per share of N3.40 the company posted in 2014.

Apart from the changes in the company’s debt profile mentioned earlier, other major developments in the balance sheet include a drop of 63% in working capital, 12% drop in trade debtors and other receivables and a 6% decline in net assets.

The company’s cash flow position improved remarkably in the third quarter with a sharp growth of 88% in net cash generated from operating activities. Net cash used for investing activities has dropped significantly and robust opening cash balances for the year assures of operating stability. The company paid a cash dividend of N1.75 per share to shareholders for its 2014 operations.