UACN Group's profit slumped by 99.05% in H1 2022 as rising debt sent the company's bottom line downward. The downward pull was despite a +11.03% rise in revenue. Higher revenue resulted from higher product and service prices which helped the company pass some of its additional operating costs to customers. However, the Group's bottom line was pummeled by a spike in its finance costs triggered by interest paid on loans procured for animal feed operations. 

All the company's business segments contributed to its improved revenues from real estate, paint products, quick service restaurants, logistics, and animal feeds. In contrast, packaged food & beverages segment contributed the least.   

Analysts observed that the company's liquidity fell between H1 2021 and H1 2022 as current and acid test ratios stumbled to 1.23 and 0.36, respectively, indicating large inventory cost-of-carry, largely in the animal feed business. During the Group's investor conference, the management highlighted falling inventory engineered by increasing end-product volumes and adopting a two-pronged approach to bulk inventory sales. 

Key Highlights 

• Revenue increased by +11.92% from N46.49bn in H1 2021 to N52.04bn in H1 2022
• Operating expenses increased by +15.70% from N6.88bn in H1 2021 to N7.96bn in H1 2022
• Profit before tax declined by -99.05% from N1.29bn to N12.34m
• PAT 
• Gross profit increased by +7.37% from N8.32bn in H1 2021 to N8.92bn in H1 2022
• Selling and distribution expenses rose by +24.04% to N3.77bn in H1 2022 to N3.03bn in H1 2021
• Administration expenses rose by +15.70% in H1 2022 
• Operating profit fell by -9.36% from 1.77bn in H1 2021 to N1.61bn in H1 2022
• Loss after tax dipped by -188.59% from N765m in H1 2021 to N677m in H1 2022

Share Price Movement 

UAC's share price was mildly volatile at the beginning of 2022, hovering between N8.00 and N12.00. The share price rose to a resistance price of N14.5 on April 12, 2022, and remained flat at N11.2 between June and July. The price resumed its slight fluctuation for August and September before recording a further dip of -8.78% at the end of September, settling at N9.35 per share (See chart 1 below).

Chart 1: 

Revenue

UAC’s revenue rose to its highest value in H1 2022 to N52.04bn from N46.49bn in H1 2021. The Group saw a substantial increase in all product segments, including animal feeds, other edibles, and paints. The +85.6% rise in other operating income also supported its growth (See chart 2 below).

Chart 2: 

Profit Before Tax

In H1 2022, the Group’s profit before tax slipped by -99.09% from N1.29bn to N12.34m, resulting from a lower operating profit, a +165.80% rise in finance cost, and a -28.82% decline in finance income. Analysts observed that the spike in finance cost originated from the interest paid on bank loans and high exchange rate losses (See chart 3 below). 

Chart 3: 

Asset Turnover Ratio

The company's asset turnover ratio showed an improvement; it increased to 0.49 in H1 2022 from 0.46 in H1 2021, revealing its efficiency in generating more revenue from its available asset. The company's total assets grew by +5.69% from N101.1bn in H1 2021 to N106.8bn in H1 2022, while the revenue increased by +11.92%. (See chart 4 below).

Chart 4: 

Current Ratio

UAC's current ratio fell to 1.23 in H1 2022 from 1.62 in H1 2021, indicating a tighter ability to cover its short-term obligations with the available current assets compared to previous years. The +39.36% increase in current liabilities against the +6.11% increase in short-term assets pulls down the ratio. The Group recorded the highest current ratio in H1 2019 and has been declining since then (See chart 5 below).
 

Chart 5: 

Quick Ratio

After subtracting inventory, the Group's liquidity ratio (Quick ratio) dropped to 0.36 in H1 2022 from 0.74, indicating liquidity squeeze. In 2020, the company's financial health was better as the company's ability to pay its current obligations from short term assets was 1.14. (See chart 6 below).

Chart 6: UACN's Quick Ratio H1 2019 - H1 2022

Debt-to-Equity Ratio

The conglomerate’s debt-to-equity ratio increased to its highest recent levels in H1 2022 to 0.61 from 0.30 in H1 2021, as the Group borrowed funds specifically for animal feeds to expand its operations. Total debt increased by +71.30% from N17.3bn in H1 2022 to N29.6bn in H1 2021 while equity decreased by -16.46% (See chart 7 below).

Chart 7: UACN's Debt-to-Equity Ratio H1 2019 - H1 2022

Concluding Thoughts

The financial outlook for the company looks grim with recent debt levels because huge interest deduction will continue to feed into the company's earnings, while rising inflation would raise the cost-of-carry of slow-moving inventory. However, the company's recent expansion strategy (for example, the commission of a new swan water line and the opening of additional 6 stores) should help grow the Group's earnings in the face of macroeconomic challenges.