uacn property development company (updc) · 2017-07-10 · uac property development company plc was...

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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

S3*

Issuer Rating: Bb-

Outlook: 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 1

Company Profile 3

Financial Condition 6

Commercial Paper Structure 9

Ownership, Mgt & Staff 10

Outlook 12

Financial Summary 14

Rating Definitions 18

Analysts:

Olusegun Owadokun [email protected]

Isaac Babatunde [email protected]

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

*This CP rating is equivalent to “A-“ for a long term rating

2


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

•Strong franchise value in the Nigerian Real Estate Market

•Stable & experienced management team

Strengths

•Weak profitability

•Inadequate working capital

•High leverage

Weaknesses

•Increased business risk given the current challenging macro-economic 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

Challenges

•Nigeria's huge housing deficit (estimated to be about 17 million units)

•Rising middle class

Opportunities

3



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 7,454m2 rentable space also located in Victoria Island,

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

PROJECTED

EARNINGS

YIELD

1 Distribution #1 December 4, 2014, 13 -month

period ended June 2014

56 Kobo 5.6% 15.2% 8.79%

2 Distribution #2 April 28, 2015 , 19 - month

period ended December 2014

31 kobo 8.7% (Cumulative

for the period ended

December 2014)

18.2% 12.02%

3 Distribution #3 December 21, 2015, 6 -month

period ended June 2015

43 Kobo 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.

4



Table 2: UPDC’s List of Completed and On-going Projects

S/

N

PROJECT NAME /

LOCATION

CATEGORY STRUCTURE NO. OF

UNITS

VALUE

(N ’M)

ESTIMATED

COMPLETION

TIME

COMMENTS

1 Metro City, Apo

Dutse Abuja

Residential

(Premium)

JV with African

Capital Alliance

104 11.1b Phase 1

Completed

Phase 1 Completed.

2 Festival Mall,

Festac Amuwo,

Lagos

Retail JV with African

Capital Alliance

and REIT

N/A 7.9b Completed Completed in

December 2015

3 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

(Premium)

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

5



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 non-

executive 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 Chairman

Mr. Hakeem Ogunniran Managing Director

Mrs. Folasade O. Ogunde Finance Director

Mrs. Halima Tayo Alao Non-executive Director

Mr. Abdul Akhor Bello Non-executive Director

Mr. Adekunle Awojobi Non-executive Director

Prof. Okon Ansa Non-executive Director

Table 4: Shareholders’ Composition

SHAREHOLDERS EQUITY STAKE (%)

UAC of Nigeria Plc 46

First Trustees Nig Ltd 9

Others 45

100

6



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 Figure 3: Operating profit & PBT margins

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

Property

Stock

75%

Rental

Income

14%

Project

Management

Fees

11%

5%

25%

45%

65%

85%

2015 2014 2013

12%8%

21%23%

47%

69%

Operating profit margin Profit before tax margin

7



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

OCF of ₦15 billion and this was sufficient to pay returns to

providers of financing amounting to ₦10.1 billion during the

period. However, the net cumulative OCF was not adequate to

cover estimated loan principal of ₦7.6 billion during the period.

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.

30%

80%

130%

180%

230%

280%

2015 2014 2013

109%

38%

76%

116% 106%

239%

Operating Cash Flow/Sales

Operating Cash Flow/Providers of financing

8



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)

As at 31 December 2015, the Company’s long term assets

stood at ₦35.6 billion, while long term funding which

consisted of equity (85%) and long term borrowings (15%)

amounted to ₦41.6 billion. UPDC’s long term funds were

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.

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.

In our opinion, UPDC has a high leverage.

(20)

(15)

(10)

(5)

0

2015 2014 2013

16 (16) (19)

In b

illi

on

s o

f

Nai

ra

40%

50%

60%

70%

2015 2014 2013

Total interest bearing liabilities/equity

Net debt/total assets

Figure 6: Leverage ratios

9



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)

Guaranteed value-Series

1('N'Million)

1 UAC OF Nigeria Plc A- Guarantee -46% of the CP Programme

11,040 7,728

2 FBN Merchant Bank *No current

rating

Liquidity Support Facility

5,000 5,000

3 Coronation Merchant Bank A- Liquidity Support Facility

5,000 5,000

Total Credit Support 21,040 17,728

*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.

10



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.

11



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 GM, Sales & Marketing

Mr. Abolade Ajolopo Manager, Estates

Mr. Charles Enahonna GM, Procurement & Supplies

Ms. Folake Kalaro Manager, Legal Services

Ms. Emem Essien Human Resource & Change Manager

12



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 National Bureau of Statistics 2 Agusto & Co Research

13



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.

14



FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT 31-Dec-15 31-Dec-14 31-Dec-13

₦'000 ₦'000 ₦'000

ASSETS

IDLE CASH 54,170 0.1% 58,858 0.1% 18,081 0.0%

MARKETABLE SECURITIES & TIME DEPOSITS - - -

CASH & EQUIVALENTS 54,170 0.1% 58,858 0.1% 18,081 0.0%

FX PURCHASED FOR IMPORTS - - -

ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS - - -

STOCKS 12,195,263 17.2% 9,742,222 14.0% 12,707,099 18.3%

TRADE DEBTORS 1,686,560 2.4% 2,097,462 3.0% 998,065 1.4%

DUE FROM RELATED PARTIES 20,467,712 28.9% 20,180,329 29.1% 19,337,465 27.9%

OTHER DEBTORS & PREPAYMENTS 733,064 1.0% 1,523,371 2.2% 610,170 0.9%

TOTAL TRADING ASSETS 35,082,599 49.6% 33,543,385 48.3% 33,652,799 48.5%

INVESTMENT PROPERTIES 16,867,015 23.8% 16,542,109 23.8% 15,328,895 22.1%

OTHER NON-CURRENT INVESTMENTS 18,577,221 26.3% 19,133,856 27.6% 20,127,550 29.0%

PROPERTY, PLANT & EQUIPMENT 104,606 0.1% 126,881 0.2% 224,481 0.3%

SPARE PARTS, RETURNABLE CONTAINERS, ETC 17,896 0.0% 15,401 0.0% 16,619 0.0%

GOODWILL, INTANGIBLES & OTHER L T ASSETS 62,508 0.1% 20,807 0.0% -

TOTAL LONG TERM ASSETS 35,629,246 50.3% 35,839,054 51.6% 35,697,545 51.5%

TOTAL ASSETS 70,766,015 100.0% 69,441,297 100.0% 69,368,425 100.0%

Growth 1.9% 0.1% -5.7%

LIABILITIES & EQUITY

SHORT TERM BORROWINGS 16,407,121 23.2% 16,025,500 23.1% 19,012,693 27.4%

CURRENT PORTION OF LONG TERM BORROWINGS - - -

LONG-TERM BORROWINGS 6,399,240 9.0% 7,501,530 10.8% 4,441,331 6.4%

TOTAL INTEREST BEARING LIABILITIES (TIBL) 22,806,361 32.2% 23,527,030 33.9% 23,454,024 33.8%

TRADE CREDITORS 2,775,256 3.9% 1,143,359 1.6% 3,411,318 4.9%

DUE TO RELATED PARTIES 6,967,167 9.8% 2,490,404 3.6% 1,260,776 1.8%

ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS 257,121 0.4% 258,686 0.4% 271,931 0.4%

OTHER CREDITORS AND ACCRUALS 1,459,050 2.1% 2,707,214 3.9% 2,428,920 3.5%

TAXATION PAYABLE 786,762 1.1% 712,928 1.0% 368,976 0.5%

DIVIDEND PAYABLE - -

DEFERRED TAXATION 483,228 0.7% 1,040,023 1.5% 1,732,957 2.5%

RETIREMENT BENEFIT OBLIGATIONS - - -

MINORITY INTEREST - - -

REDEEMABLE PREFERENCE SHARES - - -

TOTAL NON-INTEREST BEARING LIABILITIES 12,728,585 18.0% 8,352,614 12.0% 9,474,878 13.7%

TOTAL LIABILITIES 35,534,946 50.2% 31,879,644 45.9% 32,928,902 47.5%

SHARE CAPITAL 859,375 1.2% 859,375 1.2% 687,500 1.0%

SHARE PREMIUM 3,943,273 5.6% 3,943,273 5.7% 4,115,148 5.9%

IRREDEEMABLE DEBENTURES -

REVALUATION SURPLUS -

OTHER NON-DISTRIBUTABLE RESERVES -

REVENUE RESERVE 30,428,421 43.0% 32,759,005 47.2% 31,636,875 45.6%

SHAREHOLDERS' EQUITY 35,231,069 49.8% 37,561,653 54.1% 36,439,523 52.5%

TOTAL LIABILITIES & EQUITY 70,766,015 100.0% 69,441,297 100.0% 69,368,425 100.0%

15



STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED

31-Dec-15 31-Dec-14 31-Dec-13

₦'000 ₦'000 ₦'000

TURNOVER 3,738,326 100.0% 10,081,316 100.0% 9,328,425 100.0%

COST OF SALES (2,519,952) -67.4% (8,434,341) -83.7% (6,309,127) -67.6%

GROSS PROFIT 1,218,374 32.6% 1,646,975 16.3% 3,019,298 32.4%

OTHER OPERATING EXPENSES (784,304) -21.0% (858,940) -8.5% (1,016,775) -10.9%

OPERATING PROFIT 434,070 11.6% 788,035 7.8% 2,002,523 21.5%

OTHER INCOME/(EXPENSES) 440,419 11.8% 3,905,415 38.7% 4,390,706 47.1%

PROFIT BEFORE INTEREST & TAXATION 874,489 23.4% 4,693,450 46.6% 6,393,229 68.5%

INTEREST EXPENSE (2,670,625) -71.4% (2,657,289) -26.4% (2,014,157) -21.6%

PROFIT BEFORE TAXATION (1,796,136) -48.0% 2,036,161 20.2% 4,379,072 46.9%

TAX (EXPENSE) BENEFIT 324,914 8.7% 48,552 0.5% (552,112) -5.9%

PROFIT AFTER TAXATION (1,471,222) -39.4% 2,084,713 20.7% 3,826,960 41.0%

NON-RECURRING ITEMS (NET OF TAX) - - -

MINORITY INTERESTS IN GROUP PAT - - -

PROFIT AFTER TAX & MINORITY INTERESTS (1,471,222) -39.4% 2,084,713 20.7% 3,826,960 41.0%

DIVIDEND (859,375) -23.0% (962,583) -9.5% (962,500) -10.3%

PROFIT RETAINED FOR THE YEAR (2,330,597) -62.3% 1,122,130 11.1% 2,864,460 30.7%

SCRIP ISSUES

OTHER APPROPRIATIONS/ ADJUSTMENTS

PROFIT RETAINED B/FWD 32,759,005 31,636,875 28,772,415

PROFIT RETAINED C/FWD 30,428,408 32,759,005 31,636,875

Proof 1 0 -

ADDITIONAL INFORMATION 31-Dec-15 31-Dec-14 31-Dec-13

Staff costs (₦'000) 532,031 489,190 550,534

Average number of staff 126 131 124

Staff costs per employee (₦'000) 4,222 3,734 4,440

Staff costs/Turnover 14.2% 4.9% 5.9%

Capital expenditure (₦'000) 23,517 58,432 103,800

Depreciation expense - current year (₦'000) 44,813 117,332 51,028

(Profit)/Loss on sale of assets (₦'000) - - -

Number of 50 kobo shares in issue at year end ('000) 1,718,750 1,718,750 1,375,000

Market value per share of 50 kobo (year end) 609 950 1,900

Market capitalisation (₦'000) 10,467,188 16,328,125 26,125,000

Market/Book value multiple 0 0 1

Non-operating assets at balance sheet date (₦'000) 18,577,221 19,133,856 20,127,550

Market value of tradeable assets (₦'000)

Revaluation date - Investment properties

Revaluation date - Other properties

Average age of depreciable assets (years) 3 5 4

Sales at constant prices - base year 1985 (₦'000) 17,472 51,633 51,573

Auditors EY PWC PWC

Opinion CLEAN CLEAN CLEAN

16



CASH FLOW STATEMENT FOR Y/E 31-Dec-15 31-Dec-14 31-Dec-13

=N='000 =N='000 =N='000

OPERATING ACTIVITIES

Profit after tax (1,471,222) 2,084,713 3,826,960

ADJUSTMENTS

Interest expense 2,670,625 2,657,289 2,014,157

Minority interests in Group PAT - - -

Depreciation 44,813 117,332 51,028

(Profit)/Loss on sale of assets - - -

Other non-cash items 3 (1)

Potential operating cash flow 1,244,216 4,859,337 5,892,144

INCREASE/(DECREASE) IN SPONTANEOUS FINANCING:

Trade creditors 1,631,897 (2,267,959) (2,429,289)

Due to related parties 4,476,763 1,229,628 835,857

Advance payments and deposits from customers (1,565) (13,245) (2,593,714)

Other creditors & accruals (1,248,164) 278,294 946,662

Taxation payable 73,847 343,952 (381,692)

Deferred taxation (556,795) (692,934) 6,624

Obligations under unfunded pension schemes - - (168,703)

Minority interest - - -

Cash from (used by) spontaneous financing 4,375,983 (1,122,264) (3,784,255)

(INCREASE)/DECREASE IN WORKING ASSETS:

FX purchased for imports - - -

Advance payments and deposits to suppliers - - -

Stocks (2,453,041) 2,964,877 3,669,186

Trade debtors 410,902 (1,099,397) 1,021,621

Due from related parties (287,383) (842,864) (1,606,859)

Other debtors & prepayments 790,307 (913,201) 1,912,634

Cash from (used by) working assets (1,539,214) 109,414 4,996,582

CASH FROM (USED IN) OPERATING ACTIVITIES 4,080,985 3,846,487 7,104,471

RETURNS TO PROVIDERS OF FINANCING

Interest paid (2,670,625) (2,657,289) (2,014,157)

Dividend paid (859,375) (962,583) (962,500)

CASH USED IN PROVIDING RETURNS ON FINANCING (3,530,000) (3,619,872) (2,976,657)

OPERATING CASH FLOW AFTER PAYMENTS TO

PROVIDERS OF FINANCING 550,985 226,615 4,127,814

NON-RECURRING ACTIVITIES

Non-recurring items (net of tax) - - -

CASH FROM (USED IN) NON-RECURRING ACTIVITIES - - -

INVESTING ACTIVITIES

Capital expenditure (23,517) (58,432) (103,800)

Sale of assets 979 38,697 41,304

Purchase of other long term assets (net) (239,109) (770,961)

Sale of other long term assets (net) 187,533 - -

CASH FROM (USED IN) INVESTING ACTIVITIES 164,995 (258,844) (833,457)

FINANCING ACTIVITIES

Increase/(Decrease) in short term borrowings 381,621 (2,987,193) 3,142,551

Increase/(Decrease) in long term borrowings (1,102,290) 3,060,199 (6,444,913)

Proceeds of shares issued - (0) -

CASH FROM (USED IN) FINANCING ACTIVITIES (720,669) 73,006 (3,302,362)

CHANGE IN CASH INC/(DEC) (4,689) 40,777 (8,005)

OPENING CASH & MARKETABLE SECURITIES 58,858 18,081 26,086

CLOSING CASH & MARKETABLE SECURITIES 54,169 58,858 18,081

17



STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31-Dec-15 31-Dec-14 31-Dec-13

₦'000 ₦'000 ₦'000

Operating cash flow (OCF) 4,080,985 3,846,487 7,104,471

Less: Returns to providers of finance (3,530,000) (3,619,872) (2,976,657)

OCF after returns to providers of finance 550,985 226,615 4,127,814

Non-recurring items - - -

Free cash flow 550,985 226,615 4,127,814

Investing activities 164,995 (258,844) (833,457)

Financing activities (720,669) 73,006 (3,302,362)

Change in cash (4,689) 40,777 (8,005)

PROFITABILITY

PBT as % of Turnover -48% 20% 47%

Return on average equity (pre-tax) -5% 6% 13%

Real sales growth -66.2% 0.1% -20.4%

CASH FLOW

Interest cover (times) 1.5 1.4 3.5

Principal payback (years) 56.8 164.5 5.9

WORKING CAPITAL

Working capital need (days) 2,353 1,000 1,133

Working capital deficiency (days) 1,597 578 743

LEVERAGE

Interest bearing debt to Equity 65% 63% 64%

Total debt to Equity 101% 85% 90%

18



COMMERCIAL PAPER RATING DEFINITIONS

S1

Invest

men

t G

rad

e

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

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.

S4

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.

SP5

Sp

ecu

lati

ve G

rad

e

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.

SP6

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.

D

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.

19



ISSUER RATING DEFINITIONS

Aaa 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.

Aa

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.

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