Bb - FMDQ OTC Securities Exchange
Transcription
Bb - FMDQ OTC Securities Exchange
2016 Commercial Paper Rating Report UACN Property Development Company (UPDC) ₦16,799,893,000.00 183 Days Series 1 Commercial Paper under the ₦24 billion Programme CP Rating *This CP rating is equivalent to “A-“ for a long term rating S3* Issuer Rating: BbOutlook: Stable Issue Date: 21 April 2016 Expiry Date: 31 December 2016 The rating is valid throughout the life of the instrument and will be subject to periodic monitoring and review. INSIDE THIS REPORT Rating Rationale Company Profile Financial Condition Commercial Paper Structure Ownership, Mgt & Staff Outlook Financial Summary Rating Definitions 1 3 6 9 10 12 14 18 Analysts: Olusegun Owadokun olusegunowadokun@agusto.com Isaac Babatunde isaacbabatunde@agusto.com Agusto & Co. Limited UBA House (5th Floor) 57, Marina Lagos Nigeria www.agusto.com RATING RATIONALE UACN Property Development Company Plc (“UPDC”, “the Issuer”, or “the Company”) is a major player in the Nigerian Real Estate Industry. The Company, which is a subsidiary of UAC of Nigeria Plc (“UACN”), is primarily focused on the acquisition, development, sale, management and leasing of both residential and commercial properties in Nigeria. UACN Property Development Company Plc plans to issue a ₦16,799,893,000.00 (₦16.8 billion) 183 days unsecured commercial paper (“series 1”), being the first tranche under its ₦24 billion Commercial Paper Issuance Programme in 2016. The Series 1 (“the Commercial Paper”, “the CP”, “the Notes” or “the Issue”) would be used exclusively to refinance the Company’s short-term borrowings. The rating assigned to the Issuer reflects its satisfactory cash flow and good track record in the Real Estate Industry as well as stable management team. However, UPDC’s performance is tempered by declining revenue, weak profitability, inadequate working capital and high leverage. The rating assigned to the Commercial Paper has been elevated from the Issuer rating on account of the partial corporate guarantee issued by UAC of Nigeria Plc capped at 46% of the CP programme in the unlikely event of default as well as the ₦10 billion Revolving Liquidity Support Facility to be jointly arranged by FBN Merchant Bank Limited and Coronation Merchant Bank Limited (the lenders) for the Series 1 issue. The Series 1 CP is a senior unsecured obligation of the Issuer and the Notes will rank pari passu with other present and future senior unsecured obligations of the Company outstanding from time to time. Consequently, the Company will be primarily responsible for meeting the obligations of the Issue from its operating cash flow. In our opinion, the Issue has moderate credit risk on account of the financial condition of the Issuer and largely on the additional credit enhancements provided by the parent company (UACN) and the Lenders The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited. UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper Agusto & Co. therefore assigns a ‘Bb-’ rating to UACN Property Development Plc and ‘S3’ to the Series 1 Commercial Paper. Figure 1: Strengths, Weaknesses, Challenges & Opportunities Strengths •Strong franchise value in the Nigerian Real Estate Market •Stable & experienced management team Weaknesses •Weak profitability •Inadequate working capital •High leverage Challenges •Increased business risk given the current challenging macroeconomic environment •Security challenges in the Northern region of the country •Weak purchasing power and its adverse impact on residential real estate •High inflation & volatile FX which pushes up construction costs Opportunities •Nigeria's huge housing deficit (estimated to be about 17 million units) •Rising middle class 2 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper COMPANY PROFILE UAC Property Development Company Plc was carved out of the real estate division of UAC of Nigeria Plc in 1997 and was incorporated as a public limited liability company. UPDC became listed on the Nigerian Stock Exchange on 19 November 1998. The Company’s principal activities are the acquisition, development, sale, management and leasing of commercial and residential properties. UPDC’s real estate portfolio mainly comprises properties in upscale locations within Lagos, Port-Harcourt, Abuja, Asaba, Ibadan and Calabar. The Company broadly classifies its properties into Property Stock and Investment Properties. Property Stock are the properties built for sale, while Investment Properties are commercial and residential properties developed and held for capital appreciation and rental income. Residential properties are further sub-divided into classic homes, premium homes and luxury apartments. The Company also produces residential houses targeted at middle-class salary earners with access to mortgage finance, known as Comfort Homes, which are priced between ₦20 million and ₦25 million. In 2013, UPDC issued a Real Estate Investment Trust (REIT) and transferred some notable properties to the REIT including Victoria Mall Plaza (VMP) Phase 1 - a 42 unit luxury apartment block located in Victoria Island, Lagos; VMP 2 – a 15-level, purpose-built office complex with 7,454m rentable space also located in Victoria Island, 2 Lagos; and Abebe Court - a luxury estate comprising 32 units of 3-bedroom and 4-bedroom flats located in Ikoyi, Lagos. The Company currently acts as property manager for all the REIT assets and receives fees for this service. The REIT has consistently been paying cash distributions since 2014 and Table 1 shows the performance history of the REIT over the period: Table 1: REIT Performance History S/N DESCRIPTION PAYMENT DATE VALUE DIVIDEND YIELD EARNINGS YIELD 1 Distribution #1 56 Kobo 5.6% 15.2% 2 Distribution #2 December 4, 2014, 13 -month period ended June 2014 April 28, 2015 , 19 - month period ended December 2014 PROJECTED EARNINGS YIELD 8.79% 31 kobo 18.2% 12.02% 3 Distribution #3 December 21, 2015, 6 -month period ended June 2015 43 Kobo 8.7% (Cumulative for the period ended December 2014) 4.3% 5.9% 4.83% UPDC has 61.5% stake in the REIT, while the remaining is held by other investors. As part of strategy to inject fresh capital into the business, the Company plans to reduce its shareholding in the REIT to 40% by offering for sale 21.5% of its stake to the public. The sale, which is projected to be concluded by mid-2017, will generate an estimated ₦6.5 billion. Table 2 shows a summary of notable assets in UPDC’s portfolio including recently completed and on-going projects. 3 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper Table 2: UPDC’s List of Completed and On-going Projects S/ N PROJECT NAME / LOCATION CATEGORY 1 Metro City, Apo Dutse Abuja Residential (Premium) 2 Festival Mall, Festac Amuwo, Lagos 3 STRUCTURE NO. OF UNITS VALUE ESTIMATED COMPLETION TIME COMMENTS JV with African Capital Alliance 104 11.1b Phase 1 Completed Phase 1 Completed. Retail JV with African Capital Alliance and REIT N/A 7.9b Completed Completed in December 2015 Pinnacle Apartments, Maitama, Abuja Residential (Luxury) JV with Imani & Sons 27 3.4b April 2016 To be completed in April 2016 4 Olive Court, Agodi GRA, Ibadan Residential (Premium) JV with Oyo State Government 50 2.0b June 2016 Phase 1 comprising 15 units completed. Phase 2-Work in progress; to be completed in June 2016 5 Pineville, GRA Asaba Residential (Premium) UPDC 20 1.1b April 2016 Phase 1 comprising 9 units to be completed in April 2016 6 Golf Estate, Summit Hills, Calabar. Residential (Premium) JV with Cross River State Government 200 3.2b March 2016 7 typologies In progress 7 James Pinnock Place, Lekki Lagos Residential (Premium) JV with the REIT 82 4.1b June 2017 A mix of Shell and finished buildings. 8 The Residences, Festac Amuwo Odofin, Lagos Residential UPDC 196 4.5b March 2016 Project is at 95% Completion 9 Alexander Miller Apartments, Lekki Lagos Residential (Premium) UPDC 38 1.9b December 2016 Work is in progress. 10 Galaxy Mall and Galleria, GRA Kaduna Retail JV with Kaduna State Govt. N/A 4.9b January 2018 Ground breaking done and Contractors to be mobilised 11 VMP 3 Car Park and Event Centre Mixed use JV Partner is still being sourced N/A 7.6b July 2017 Contractors mobilized, pilling works on-going (N ’M) (Premium) 4 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper UPDC has two subsidiaries, UPDC Hotels Ltd and Manor Gardens Property Development Company. UPDC Hotels Ltd oversees the operations of Golden Tulip Festac Hotel - the former Festac ’77 Hotel, which was purchased from the Federal Government in 2002. The hotel has 471 rooms, restaurants, conference & banquet facilities, sporting facilities, offices and shops. Manor Gardens Property Development Company (MGPDC) was incorporated in 2002 and is jointly owned by UPDC Plc (67.5%) and Top Services Limited (32.5%). UPDC’s head office is located at UAC House, 1-5 Odunlami Street, Lagos Island, Lagos. The Company’s major shareholders are UAC of Nigeria Plc (46%) and First Trustees Nigeria Ltd (9%). Individuals and other corporate bodies hold the balance of the Company’s equity (45%). UPDC is governed by a seven-member Board of Directors, comprising two executive directors and five nonexecutive directors. Mr. Larry Ephraim Ettah leads the Board as Chairman, while Mr. Hakeem Ogunniran is the Managing Director. In the year under review, there were no changes to the Board. In 2015, UPDC employed an average of 126 persons (2014: 131 persons). As at 31 December 2015, UPDC’s total assets stood at ₦70.8 billion, while shareholders’ funds amounted to ₦35.3 billion. During the same period, the Company generated ₦3.7 billion revenue, but recorded a loss after tax of ₦1.4 billion. Table 3: Current Board of Directors CURRENT DIRECTORS Mr. Larry Ephraim Ettah Mr. Hakeem Ogunniran Mrs. Folasade O. Ogunde Mrs. Halima Tayo Alao Mr. Abdul Akhor Bello Mr. Adekunle Awojobi Prof. Okon Ansa Chairman Managing Director Finance Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Table 4: Shareholders’ Composition SHAREHOLDERS UAC of Nigeria Plc First Trustees Nig Ltd Others EQUITY STAKE (%) 46 9 45 100 5 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper FINANCIAL CONDITION ANALYSTS’ COMMENTS The proposed ₦16.8 billion Series 1 Commercial Paper under the N24 billion Commercial Paper Issuance Programme is repayable primarily from the operating cash flow of UPDC; hence we have analysed the financial condition of the Company for the year ended 31 December 2015. PROFITABILITY UACN Property Development Company Plc generates revenue primarily from the acquisition, development, sale, leasing and management of residential, retail and commercial properties in the luxury, premium and classic segments of the Nigerian real estate market. During the year ended 31 December 2015, the Company’s revenue amounted to ₦3.7 billion, representing a 63% decline from prior year. The reduction in revenue was largely attributed to the non-recognition of some properties pre-sold which did not meet the revenue recognition criteria as well as the James Pinnock Development which could not be recognised as income due to the fact that the project is now being executed under a joint venture arrangement. The challenging macroeconomic environment, insecurity in the North-East and the uncertainty regarding the 2015 General Elections also contributed to a slowdown in sales during the review period. Sale of property stock was the largest contributor to revenue at 75% in 2015. Rental income and project management fees contributed 14% and 11% respectively during the period under review. Figure 2: Breakdown of Sales Project Management Fees 11% Rental Income 14% Figure 3: Operating profit & PBT margins 85% 69% 65% 45% Property Stock 75% 25% 47% 12% 23% 21% 8% 5% 2015 2014 Operating profit margin 2013 Profit before tax margin The Company’s costs of sales to turnover ratio improved to 67%, compared to prior year (84%). This resulted in a higher gross profit margin of 33% in 2015 as against 16% recorded in the prior year. Although UPDC’ operating expenses dropped by 8.6% to ₦784.3 million, the Company’s operating expenses-to-sales ratio rose from 8.5% in 2014 to 21% in 2015 due to declining sales. In the year under review, UPDC recorded an operating profit of ₦434.1 million, representing a drop of 45% over previous year. In addition, the Company’s profit before interest & tax declined considerably by 81% to ₦874.5 million (2014: ₦4.7 billion) mainly due to a ₦2.1 billion impairment charge. This charge was as a result of erosion in value of the Company’s equity investment in UPDC Hotels Limited which accounted for the 89% drop in other income during the year. The Golden Tulip Festac Hotel has been struggling of late with average 6 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper occupancy rate of 28% in 2015 (2014: 37%) due to the traffic and security concerns in the Festac area. Consequently, UPDC posted a loss before tax of ₦1.8 billion in 2015 (2014: profit before tax of ₦2 billion). However, the loss after tax dropped marginally to ₦1.5 billion on account of the tax benefits claimed in the year. Due to the loss recorded during the year under review, the Company’s profitability indices were generally poor with a pre-tax return on assets (ROA) of 0.07% and a negative pre-tax return on equity (ROE) of 5% in 2015. Looking ahead, UPDC intends to recognize its pre-sold properties from prior year and also increase sales of commercial real estate units. In addition, the one-off impairment charge of ₦2.1 billion which eroded profit in 2015 is not expected to reoccur in the current year. Consequently, we expect UPDC’s profitability to improve in the short to medium term. In our opinion, the Company’s profitability is weak and requires improvement. CASH FLOW UPDC generates cash from outright and off-plan sale of properties, rental income and management fees on investment properties as well as from distribution by UPDC REIT. During the year ended 31 December 2015, UPDC’s operating cash flow (OCF) rose by 6% to ₦4 billion over prior year. The improvement in OCF was driven principally by significant increases in amounts due to related parties and trade creditors. Although the OCF was sufficient to pay returns to providers of financing as well as estimated mandatory capital expenditure during the period, it was not adequate to cover amortised estimated principal. Figure 4: Operating cash flow ratios Over the last three years, the Company recorded cumulative 280% 239% 230% providers of financing amounting to ₦10.1 billion during the 180% 130% OCF of ₦15 billion and this was sufficient to pay returns to 109% 116% 80% 106% 76% 38% cover estimated loan principal of ₦7.6 billion during the period. 30% 2015 2014 period. However, the net cumulative OCF was not adequate to 2013 Operating Cash Flow/Sales Operating Cash Flow/Providers of financing UPDC’s three-year weighted averages for operating profit margin (12%) and OCF as a percentage to providers of financing (148%) are both in line with our benchmark. In the same vein, the Company’s OCF to sales ratio of 109%, largely on account of pre-sales of properties, surpassed our expectation. However, we note the declining trend in OCF/providers of financing ratio in the last three years due to the drop in sales amidst rising financing costs. Overall, UPDC’s cash flow position is satisfactory. 7 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL As at 31 December 2015, UACN Property Development Company Plc had working assets of ₦35.1 billion, consisting largely of amounts due from related parties (58%), stocks (35%) and trade debtors (5%). Related parties dues comprised receivables from the parent company, UACN and other associated companies. As at the same date, the Company’s spontaneous financing which comprised mainly amounts due to related parties (55%), trade creditors (22%) and other creditors & accruals (11%) stood at ₦12.7 billion. UPDC’s spontaneous financing was inadequate to fund the working assets, leaving a working capital need of ₦22.4 billion. Figure 5: Working capital surplus/ (deficiency) In billions of Naira As at 31 December 2015, the Company’s long term assets 0 stood at ₦35.6 billion, while long term funding which (5) consisted of equity (85%) and long term borrowings (15%) (10) amounted to ₦41.6 billion. UPDC’s long term funds were (15) 16 (16) (19) 2015 2014 2013 (20) therefore sufficient to cover the long term assets leading to a working capital balance of ₦6 billion. However, the available working capital was not enough to cover the short term capital need, leaving an overall working capital deficiency of ₦16.4 billion. We note negatively that the Company has been running working capital deficiencies over the last three years. In our view, the Company’s working capital is inadequate. LEVERAGE As at 31 December 2015, UPDC’s total liabilities, comprising interest bearing (64%) and non-interest bearing liabilities (36%), amounted to ₦35.5 billion. The interest bearing liabilities were made up of short term and long term borrowings of 67% and 33% respectively. Trade creditors, other creditors & accruals and a portion of amounts due to related parties largely accounted for the 36% non-interest bearing liabilities. Figure 6: Leverage ratios The Company’s interest bearing debt as a percentage of equity (65%) and net debt as a percentage of total assets (51%) are both within our threshold. UPDC’s interest expense as a percentage of sales in 2015 was very high at 71%, which leaves little room for financial flexibility. The Company’s three-year cumulative interest cover ratio of 205% was also below our benchmark. 70% 60% 50% 40% 2015 2014 2013 Total interest bearing liabilities/equity In our opinion, UPDC has a high leverage. Net debt/total assets 8 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper COMMERCIAL PAPER STRUCTURE UACN Property Development Company Plc plans to issue a ₦16.8 billion 183 days unsecured commercial paper (“Series 1”) in 2016, representing the first tranche under its ₦24 billion Commercial Paper Issuance Programme. The net proceeds of the first tranche, which will be issued at a market-reflective rate, will be used solely to refinance existing short term borrowings of the Company, which were priced at an average interest rate of 16.6% as at 31 December 2015. The Commercial Paper Programme is supported by a partial corporate guarantee of the parent company, UAC of Nigeria Plc, subject to a limit of 46% of the CP Programme. The Programme is equally backed by a ₦10 billion Liquidity Support Facility which will be jointly provided by FBN Merchant Bank Limited and Coronation Merchant Bank Limited with each lender contributing ₦5 billion each. The purpose of the Facility is to provide liquidity back stop for the ₦16.8 billion Series 1 Commercial Paper. The total value of these enhancements for the Series 1 CP is estimated to be ₦17.7 billion, representing a coverage ratio of 105%. Table 5: Schedule of Credit Enhancements for the CP Issuance Programme S/N Description Rating Support Type Value ('N'million) Guarantee -46% of the CP Programme Liquidity Support Facility 11,040 Guaranteed value-Series 1('N'Million) 7,728 5,000 5,000 Liquidity Support Facility 5,000 5,000 21,040 17,728 1 UAC OF Nigeria Plc A- 2 FBN Merchant Bank 3 Coronation Merchant Bank *No current rating A- Total Credit Support *Subsequent to the acquisition of Kakawa Discount House Limited by FBN Holdings in November 2014, Kakawa Discount was upgraded to a merchant bank to form the new FBN Merchant Bank Limited in 2015. Kakawa Discount was rated ‘A-‘ by Agusto & Co. shortly before the acquisition. However, the rating is no longer valid following acquisition and rebranding. The CP issued under the Programme will be zero-coupon notes denominated in Naira and as such, will be offered and sold at a discount to face value. The Issue will thus not bear interest, and the Issuer will not be required to withhold or deduct tax from payments in respect of the Notes to the Noteholders. However, the discount on the Notes may be taxed in accordance with applicable Nigerian tax laws. The Note will be issued through book-entry deposit by crediting the Central Securities Clearing System (CSCS) account of applicants and a Register of Noteholders shall be maintained by the CSCS The Series 1 CP will be issued at a market-reflective discounted price redeemable only at maturity at a par value of ₦16.8 billion. Each Note constitutes a senior unsecured obligation of the Issuer and the Notes rank pari passu with other present and future senior unsecured obligations of the Issuer outstanding from time to time. The nominal amount per note is ₦1,000 with a tenor of 183 days. 9 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper In accordance with the Deed of Covenant, a Register of Noteholders shall be maintained by the Central Securities Clearing System. The Register shall reflect the number of Notes issued and shall contain the name, address, and bank account details of the registered Noteholders as well as the aggregate principal amount of the Notes issued to such Noteholder and the date of issue. The payments of outstanding obligations in respect of the Noteholders shall be by electronic transfer. OWNERSHIP, MANAGEMENT & STAFF As at 31 December 2015, UACN Property Development Company Plc had 1,718,750,000 ordinary shares of 50 kobo each issued and fully paid, with UAC of Nigeria Plc (UACN) holding the largest stake of 46%. FBN Trustees Nigeria Limited held 9% shareholding, while the balance of 45% was held by other individuals & corporate bodies as at that date. The Company has a seven-member Board of Directors comprising two executive directors and five non-executive directors. The Board is led by its chairman Mr. Larry Ephraim Ettah, while the Managing Director is Mr. Hakeem Ogunniran. UPDC’s management team led by the Managing Director is made up of nine members, with each bringing on board cumulative years of diversified and relevant cognate experience. We note that majority of the management team have been with the Company or related companies within the Group for over ten years. In our opinion, UPDC’s management is stable and has requisite experience in the management of real estate development business. As at 31 December 2015, UPDC had 126 employees compared to 131 employees in the prior year. In the year under review, the Company’s average cost per employee rose by 13% to ₦4.2 million. However, the revenue per staff dropped by 58% to ₦32 million due to the decline in sales in 2015. The revenue per staff was able to cover average cost per employee 7.6 times in the year under review (2014: 20.6 times), which we consider to be satisfactory. Management Team Mr. Hakeem Ogunniran is the Managing Director of UPDC. He holds LL.B, LL.M and MBA degrees from the University of Lagos. Between 1986 and 1992, he lectured at the University of Ilorin and the University of Lagos. Subsequently, Mr Ogunniran worked at Goldlink Insurance Company Ltd as the Group Secretary/Legal Adviser. He joined UACN as Manager, Legal Services in 1995 and was later appointed Western Area Manager and Marketing Manager of GBO/MDS Division of UACN. He was appointed Divisional Managing Director of MDS Logistics, a division of UACN in April 2000. Mr Ogunniran was appointed the Managing Director of UPDC in January 2010. 10 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper A former Fulbright Scholar, he has attended various senior management and leadership programmes at Ashridge Management College, UK; Cranfield University, UK; Harvard Business School; and London Business School. Mr. Ogunniran is a Fellow of the Institute of Chartered Secretaries and Administrators, London and Nigeria. He is also a Fellow of the Chartered Institute of Arbitrators, United Kingdom. Mrs. Folasade Ogunde is UPDC’s Finance Director. She holds a Bachelor’s degree in Economics from the University of Ife (now Obafemi Awolowo University), Ile-Ife. Mrs. Ogunde is a Fellow of the Institute of Chartered Accountants of Nigeria (ICAN) and holds the FMP certification from the International Facility Management Association (IFMA). She started her career with the firm of Deloitte Haskins & Sells before joining UACN in 1997. She has held various positions within the Group including Management Accountant, UAC Foods; Divisional Commercial Director, Mr. Biggs’s (now UAC Restaurants); and Group Treasurer, UACN. She was appointed the Finance Director of UPDC in 2005. Mrs. Ogunde has attended senior management and leadership programmes at Ashridge Management College, UK; Cranfield University, UK; and Harvard Business School, USA. Other members of UPDC Plc.’s management team include: Mr. Yemi E. Ejidiran Director, Business Development Mr. Brian Greenaway Director, Technical Operations Ms. Titilayo Gbadamosi Mr. Abolade Ajolopo Mr. Charles Enahonna Ms. Folake Kalaro Ms. Emem Essien GM, Sales & Marketing Manager, Estates GM, Procurement & Supplies Manager, Legal Services Human Resource & Change Manager 11 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper OUTLOOK The anxiety surrounding the 2015 general elections, combined with the plunge in oil prices and the fragile security situation in the North Eastern part of the country, made 2015 a very challenging year for businesses in general and the Real Estate Industry in particular. The depreciation and volatility of the Naira compounded the woes for businesses last year. This was reflected in the drop in GDP growth rate from 6.23% in 2014 to 2.8%1 in 2015. Agusto & Co expects the slowdown in GDP growth to persist in 2016 with growth rate projected to be around 2%2. Nevertheless, with the Federal Government of Nigeria’s proposed ambitious expansionary 2016 budget of ₦6.1 trillion with special attention on investments in key infrastructure such as power, works and housing to reflate the economy, we anticipate that growth will pick up in the medium to long term. In spite of the challenging macroeconomic environment, the Company’s performance in terms of units of properties sold remained almost at par at 137 units in 2015 relative to prior year’s (2014: 140 units). However, in the year ended 31 December 2015, the fall in UPDC’s revenue was attributed mainly to the non-recognition of some properties pre-sold as well as the James Pinnock Development which could not be recognised as income due to the fact the project is now being executed under a joint venture arrangement. Consequently, Agusto & Co expects an improvement in the Company’s revenue in 2016 when these sales are accounted for in UPDC’s books. However, this will only translate to improvement in profitability in the short term contingent upon the Company’s ability to efficiently manage operational and financing costs. Given the Issuer’s five-year strategic plan to have a strong footprint in the commercial real estate market, the Company plans to rebalance its portfolio from the current 80:20 ratio (residential vs. commercial) to a balanced ratio of 50:50 in the medium term. This is already evidenced in the successful completion of the Festival Mall in Festac in the last quarter of 2015, the planned development of a shopping mall in Kaduna and three additional malls being proposed for the Lagos market in the near term. In addition, UPDC is committed to remaining an active player in the residential segment with projects such as the Pinnacle Apartments (Abuja), Olive Court (Ibadan), Pineville (Asaba), Golf Estate Summit Hills (Calabar), James Pinnock Place, The Residences and Alexander Miller (all in Lagos) at various stages of development. To further boost the working capital position, the Company plans to recapitalise by way of rights issue which is estimated to realise about ₦5.6 billion. The rights issue is expected to be finalised in the second quarter of 2016. In addition, UPDC has decided to offer some of the assets currently being held as investment properties for sale in the second quarter of 2016 and this is projected to generate approximately ₦2.7 billion. In the medium term, the Company intends to sell off an additional 21.5% stake in the REIT to bring its holdings in the REIT to 40%. This is expected to generate additional ₦6.5 billion in cash. UPDC has also taken the strategic decision to position the Golden Tulip Festac Hotel to be a notable destination of choice for conferencing and banqueting events with the eventual plan to exit the investment (the hotel business) in 2017. 1 2 National Bureau of Statistics Agusto & Co Research 12 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper In our opinion, the Company’s working capital and leverage would improve in the event of the successful consummation of the aforementioned initiatives particularly the proposed additional equity injection through the rights issue. The Company intends to issue Series 1 CP amounting to ₦16.8 billion as the first tranche under the ₦24 Billion Commercial Paper Programme in 2016 to refinance existing short term borrowings. The 183 days CP, which will be issued at a market-reflective discounted price, is redeemable at maturity at a par value of ₦16.8 billion. In our opinion, the Issuer has the capacity to meet the obligations on the Commercial Paper from its operating cash flow in a timely manner. The Issue is further enhanced by the 46% partial corporate guarantee from UAC of Nigeria Plc as well as the ₦10 billion Liquidity Support Facility which is to be jointly provided by both FBN Merchant Bank Limited and Coronation Merchant Bank Limited. Based on the aforementioned, we attach a stable outlook to the Issue. 13 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT ASSETS IDLE CASH MARKETABLE SECURITIES & TIME DEPOSITS CASH & EQUIVALENTS FX PURCHASED FOR IMPORTS ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS STOCKS TRADE DEBTORS DUE FROM RELATED PARTIES OTHER DEBTORS & PREPAYMENTS TOTAL TRADING ASSETS INVESTMENT PROPERTIES OTHER NON-CURRENT INVESTMENTS PROPERTY, PLANT & EQUIPMENT SPARE PARTS, RETURNABLE CONTAINERS, ETC GOODWILL, INTANGIBLES & OTHER L T ASSETS TOTAL LONG TERM ASSETS TOTAL ASSETS Growth LIABILITIES & EQUITY SHORT TERM BORROWINGS CURRENT PORTION OF LONG TERM BORROWINGS LONG-TERM BORROWINGS TOTAL INTEREST BEARING LIABILITIES (TIBL) TRADE CREDITORS DUE TO RELATED PARTIES ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS OTHER CREDITORS AND ACCRUALS TAXATION PAYABLE DIVIDEND PAYABLE DEFERRED TAXATION RETIREMENT BENEFIT OBLIGATIONS MINORITY INTEREST REDEEMABLE PREFERENCE SHARES TOTAL NON-INTEREST BEARING LIABILITIES TOTAL LIABILITIES SHARE CAPITAL SHARE PREMIUM IRREDEEMABLE DEBENTURES REVALUATION SURPLUS OTHER NON-DISTRIBUTABLE RESERVES REVENUE RESERVE SHAREHOLDERS' EQUITY TOTAL LIABILITIES & EQUITY 31-Dec-15 ₦'000 54,170 54,170 12,195,263 1,686,560 20,467,712 733,064 35,082,599 16,867,015 18,577,221 104,606 17,896 62,508 35,629,246 70,766,015 1.9% 16,407,121 6,399,240 22,806,361 2,775,256 6,967,167 257,121 1,459,050 786,762 483,228 12,728,585 35,534,946 859,375 3,943,273 30,428,421 35,231,069 70,766,015 14 2016 Commercial Paper Rating Report 31-Dec-14 ₦'000 0.1% 0.1% 17.2% 2.4% 28.9% 1.0% 49.6% 23.8% 26.3% 0.1% 0.0% 0.1% 50.3% 100.0% 23.2% 58,858 58,858 9,742,222 2,097,462 20,180,329 1,523,371 33,543,385 16,542,109 19,133,856 126,881 15,401 20,807 35,839,054 69,441,297 0.1% 18.0% 50.2% 1.2% 5.6% 16,025,500 7,501,530 23,527,030 1,143,359 2,490,404 258,686 2,707,214 712,928 1,040,023 8,352,614 31,879,644 859,375 3,943,273 43.0% 49.8% 100.0% 32,759,005 37,561,653 69,441,297 9.0% 32.2% 3.9% 9.8% 0.4% 2.1% 1.1% 0.7% 31-Dec-13 ₦'000 0.1% 0.1% 14.0% 3.0% 29.1% 2.2% 48.3% 23.8% 27.6% 0.2% 0.0% 0.0% 51.6% 100.0% 23.1% 10.8% 33.9% 1.6% 3.6% 0.4% 3.9% 1.0% 1.5% 18,081 18,081 12,707,099 998,065 19,337,465 610,170 33,652,799 15,328,895 20,127,550 224,481 16,619 35,697,545 69,368,425 -5.7% 19,012,693 4,441,331 23,454,024 3,411,318 1,260,776 271,931 2,428,920 368,976 0.0% 0.0% 18.3% 1.4% 27.9% 0.9% 48.5% 22.1% 29.0% 0.3% 0.0% 51.5% 100.0% 27.4% 6.4% 33.8% 4.9% 1.8% 0.4% 3.5% 0.5% 12.0% 45.9% 1.2% 5.7% 1,732,957 9,474,878 32,928,902 687,500 4,115,148 2.5% 13.7% 47.5% 1.0% 5.9% 47.2% 54.1% 100.0% 31,636,875 36,439,523 69,368,425 45.6% 52.5% 100.0% UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED TURNOVER COST OF SALES GROSS PROFIT OTHER OPERATING EXPENSES OPERATING PROFIT OTHER INCOME/(EXPENSES) PROFIT BEFORE INTEREST & TAXATION INTEREST EXPENSE PROFIT BEFORE TAXATION TAX (EXPENSE) BENEFIT PROFIT AFTER TAXATION NON-RECURRING ITEMS (NET OF TAX) MINORITY INTERESTS IN GROUP PAT PROFIT AFTER TAX & MINORITY INTERESTS DIVIDEND PROFIT RETAINED FOR THE YEAR SCRIP ISSUES OTHER APPROPRIATIONS/ ADJUSTMENTS PROFIT RETAINED B/FWD PROFIT RETAINED C/FWD Proof ADDITIONAL INFORMATION Staff costs (₦'000) Average number of staff Staff costs per employee (₦'000) Staff costs/Turnover Capital expenditure (₦'000) Depreciation expense - current year (₦'000) (Profit)/Loss on sale of assets (₦'000) Number of 50 kobo shares in issue at year end ('000) Market value per share of 50 kobo (year end) Market capitalisation (₦'000) Market/Book value multiple Non-operating assets at balance sheet date (₦'000) Market value of tradeable assets (₦'000) Revaluation date - Investment properties Revaluation date - Other properties Average age of depreciable assets (years) Sales at constant prices - base year 1985 (₦'000) Auditors Opinion 31-Dec-15 ₦'000 3,738,326 (2,519,952) 1,218,374 (784,304) 434,070 440,419 874,489 (2,670,625) (1,796,136) 324,914 (1,471,222) (1,471,222) (859,375) (2,330,597) 100.0% -67.4% 32.6% -21.0% 11.6% 11.8% 23.4% -71.4% -48.0% 8.7% -39.4% -39.4% -23.0% -62.3% ₦'000 10,081,316 (8,434,341) 1,646,975 (858,940) 788,035 3,905,415 4,693,450 (2,657,289) 2,036,161 48,552 2,084,713 2,084,713 (962,583) 1,122,130 31-Dec-13 100.0% -83.7% 16.3% -8.5% 7.8% 38.7% 46.6% -26.4% 20.2% 0.5% 20.7% 20.7% -9.5% 11.1% ₦'000 9,328,425 (6,309,127) 3,019,298 (1,016,775) 2,002,523 4,390,706 6,393,229 (2,014,157) 4,379,072 (552,112) 3,826,960 3,826,960 (962,500) 2,864,460 32,759,005 30,428,408 1 31,636,875 32,759,005 0 28,772,415 31,636,875 - 31-Dec-15 532,031 126 4,222 14.2% 23,517 44,813 1,718,750 609 10,467,188 0 18,577,221 31-Dec-14 489,190 131 3,734 4.9% 58,432 117,332 1,718,750 950 16,328,125 0 19,133,856 31-Dec-13 550,534 124 4,440 5.9% 103,800 51,028 1,375,000 1,900 26,125,000 1 20,127,550 3 17,472 EY CLEAN 5 51,633 PWC CLEAN 4 51,573 PWC CLEAN 15 2016 Commercial Paper Rating Report 31-Dec-14 100.0% -67.6% 32.4% -10.9% 21.5% 47.1% 68.5% -21.6% 46.9% -5.9% 41.0% 41.0% -10.3% 30.7% UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper CASH FLOW STATEMENT FOR Y/E 31-Dec-15 =N='000 31-Dec-14 =N='000 31-Dec-13 =N='000 (1,471,222) 2,084,713 3,826,960 2,670,625 44,813 1,244,216 2,657,289 117,332 3 4,859,337 2,014,157 51,028 (1) 5,892,144 1,631,897 4,476,763 (1,565) (1,248,164) 73,847 (556,795) 4,375,983 (2,267,959) 1,229,628 (13,245) 278,294 343,952 (692,934) (1,122,264) (2,429,289) 835,857 (2,593,714) 946,662 (381,692) 6,624 (168,703) (3,784,255) (2,453,041) 410,902 (287,383) 790,307 (1,539,214) 4,080,985 2,964,877 (1,099,397) (842,864) (913,201) 109,414 3,846,487 3,669,186 1,021,621 (1,606,859) 1,912,634 4,996,582 7,104,471 (2,670,625) (859,375) (3,530,000) (2,657,289) (962,583) (3,619,872) (2,014,157) (962,500) (2,976,657) 550,985 226,615 4,127,814 - - - (23,517) 979 187,533 164,995 (58,432) 38,697 (239,109) (258,844) (103,800) 41,304 (770,961) (833,457) FINANCING ACTIVITIES Increase/(Decrease) in short term borrowings Increase/(Decrease) in long term borrowings Proceeds of shares issued CASH FROM (USED IN) FINANCING ACTIVITIES 381,621 (1,102,290) (720,669) (2,987,193) 3,060,199 (0) 73,006 3,142,551 (6,444,913) (3,302,362) CHANGE IN CASH INC/(DEC) OPENING CASH & MARKETABLE SECURITIES CLOSING CASH & MARKETABLE SECURITIES (4,689) 58,858 54,169 40,777 18,081 58,858 (8,005) 26,086 18,081 OPERATING ACTIVITIES Profit after tax ADJUSTMENTS Interest expense Minority interests in Group PAT Depreciation (Profit)/Loss on sale of assets Other non-cash items Potential operating cash flow INCREASE/(DECREASE) IN SPONTANEOUS FINANCING: Trade creditors Due to related parties Advance payments and deposits from customers Other creditors & accruals Taxation payable Deferred taxation Obligations under unfunded pension schemes Minority interest Cash from (used by) spontaneous financing (INCREASE)/DECREASE IN WORKING ASSETS: FX purchased for imports Advance payments and deposits to suppliers Stocks Trade debtors Due from related parties Other debtors & prepayments Cash from (used by) working assets CASH FROM (USED IN) OPERATING ACTIVITIES RETURNS TO PROVIDERS OF FINANCING Interest paid Dividend paid CASH USED IN PROVIDING RETURNS ON FINANCING OPERATING CASH FLOW AFTER PAYMENTS TO PROVIDERS OF FINANCING NON-RECURRING ACTIVITIES Non-recurring items (net of tax) CASH FROM (USED IN) NON-RECURRING ACTIVITIES INVESTING ACTIVITIES Capital expenditure Sale of assets Purchase of other long term assets (net) Sale of other long term assets (net) CASH FROM (USED IN) INVESTING ACTIVITIES 16 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper STATEMENT OF CASH FLOW FOR THE YEAR ENDED Operating cash flow (OCF) Less: Returns to providers of finance OCF after returns to providers of finance Non-recurring items Free cash flow Investing activities Financing activities Change in cash PROFITABILITY PBT as % of Turnover Return on average equity (pre-tax) Real sales growth CASH FLOW Interest cover (times) Principal payback (years) WORKING CAPITAL Working capital need (days) Working capital deficiency (days) LEVERAGE Interest bearing debt to Equity Total debt to Equity 17 2016 Commercial Paper Rating Report 31-Dec-15 ₦'000 4,080,985 (3,530,000) 550,985 550,985 164,995 (720,669) (4,689) 31-Dec-14 ₦'000 3,846,487 (3,619,872) 226,615 226,615 (258,844) 73,006 40,777 31-Dec-13 ₦'000 7,104,471 (2,976,657) 4,127,814 4,127,814 (833,457) (3,302,362) (8,005) -48% -5% -66.2% 20% 6% 0.1% 47% 13% -20.4% 1.5 56.8 1.4 164.5 3.5 5.9 2,353 1,597 1,000 578 1,133 743 65% 101% 63% 85% 64% 90% UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper COMMERCIAL PAPER RATING DEFINITIONS Commercial Paper rated `S1' are judged to offer HIGHEST safety of timely payment of interest and principal. S2 Commercial Paper rated 'S2' are judged to offer VERY HIGH safety of timely payment of interest and principal. S3 Investment Grade S1 Commercial Paper rated `S4' are judged to offer ADEQUATE safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rated categories. S4 D Speculative Grade SP5 SP6 Commercial Paper rated `S3' are judged to offer HIGH safety of timely payment of interest and principal; however, changes in circumstances can adversely affect such issues more than those in the higher rated categories. Commercial Paper rated `SP5' are judged to carry INADEQUATE safety of timely payment of interest and principal; while they are less susceptible to default than other speculative grade instruments in the immediate future, the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments. Commercial Paper rated `SP6' are judged to be SUSCEPTIBLE to default; while currently interest and principal payments are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. Commercial Paper rated `D' are in PAYMENT DEFAULT and in arrears of interest or principal payments or are expected to default on maturity. Such instruments are extremely speculative and returns from these CP may be realized only on reorganisation or liquidation. 18 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper ISSUER RATING DEFINITIONS Aaa Aa This is the highest rating category. It indicates a company with impeccable financial condition and overwhelming ability to meet obligations as and when they fall due. This is a company that possesses very strong financial condition and very strong capacity to meet obligations as and when they fall due. However, the risk factors are somewhat higher than for Aaa obligors. A This is a company with good financial condition and strong capacity to repay obligations on a timely basis. Bbb This refers to companies with satisfactory financial condition and adequate capacity to meet obligations as and when they fall due. Bb This refers to companies with satisfactory financial condition but capacity to meet obligations as and when they fall due may be contingent upon refinancing. The company may have one or more major weakness (es). B This refers to a company that has weak financial condition and capacity to meet obligations in a timely manner is contingent on refinancing. C This refers to an obligor with very weak financial condition and weak capacity to meet obligations in a timely manner. D In default. Rating Category Modifiers A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus) sign. 19 2016 Commercial Paper Rating Report UPDC’s ₦16.8 Billion 183 days Series 1 Commercial Paper THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY 20 2016 Commercial Paper Rating Report 21 2016 Commercial Paper Rating Report