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• In this report, we resume coverage on UACN with a target price of N8.96 which translates to a BUY rating at current price. While UACN’s history of reporting poor operating performance dulled investor’s sentiment, we believe lower finance cost and little or no impairment charge in coming years, post exit from UPDC, supports a rerating. Coupled with recovery in the feeds business, we see improvement in earnings over our forecast period. Comparing 5-year historical average EV/EBITDA of 9.9x, to current level of 3.3x, UACN presents a good entry point on current valuation. At current price and based on our FY 19E dividend of N0.65, we view expected dividend yield of 10.6% as attractive and could be compelling to investors.

• Restructuring exercise is positive for UACN. Ahead of the planned restructuring of UACN (which would involve UACN’s outright dissolution of its interest in UPDC directly to its shareholders), UPDC was classified as a discontinued operation as at 9M 19 unaudited numbers. Accordingly, related finance cost and impairment charges (through the fair value difference between UPDC REIT and market value) were classified as discontinued operation, leaving UACN 9M 19 numbers at the strongest level we modelled post restructuring. With the exclusion of UPDC from 9M numbers and restatement of prior year, UACN delivered EBIT and PBT expansion of 175bps and 150bps YoY respectively, with EPS growing 30% YoY. Notably, without the exclusion of UPDC and restatement of the prior year, UACN would have reported a loss after tax of N12.8 billion (9M 18 loss of N994 million). With the exclusion of the volatility emanating from impairment charge on the real estate property and higher finance expense (UPDC account for 80% to 90% of total UACN borrowings) we expect stable growth in earnings over our forecast period, with EPS CAGR of 12.4% between 2020 and 2024.

• Recovery in feeds business to soften OPEX pressure. Our market survey revealed that OLAM and UACN’s feed products now sell at similar price points, as OLAM steps down its aggressive pricing strategy. As a result, we see improvement in sales from feeds with contribution to group revenue gradually picking up to pre-2018 levels. In the short term, we believe the extended border closure creates some incentive for sales upside for local poultry products and by extension the feeds business.

• Value play or value trap? With the recovery in sale of feeds already evident in the 9M 19 numbers, amidst flattened cost, we expect improvement in gross and operating margins by 117bps and 116bps YoY to 19% and 3.9% respectively in 2019. Though the management guided to an improvement in its operating expense, we are less optimistic of a significant change as the company has only been able to tame the cost and not reduce it as at 9M 19. On that note, we left opex to sales ratio unchanged at 15% till 2020 and gradual improvement from 2021 with mild improvement in operating margin to 4.1% in 2020 and average of 7% over FY21-24. Further down, with reduced finance cost and absence of impairment charge, following the reclassification of UPDC as discontinued operation, we expect earnings from continued operation to print at N1.35 in 2020 (N1.32 in FY 19E from a loss per share of N2.08 recorded in the prior year) with 5-year earnings CAGR of 12.4% between 2020 and 2024. At current market price, UACN trades at 2019E and 2020E EV/EBITDA of 3.12x and 3.01x respectively, which is attractive when compared to 5-year historical average of 9.9x.

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