Uganda Clays Ltd FY2015 Published Financials Snapshot 18th May 2016 Hold Uganda Clays Limited (USE: UCL) Financial Statements 2015: Rise in Topline Revenues Eroded by Shareholder Loan Price 17/05/16 UGX 15 12m Target Price* UGX 13 Analyst Opinion: Downside to TP (13.33%) HOLD with a 1-Year Target price of Ugx13 ($0.004): Uganda Clays Limited published financial statements on 16th May 2016 revealed a marginal upside in the company’s core business owing to higher revenues and reduced operating expenses compared to 2014. The improved performance was also supported by one off incomes of Ugx3.1Bn ($936,382) arising from land acquired by the Uganda National Roads Authority (UNRA) for the construction of the Entebbe express highway. Management notes revealed that the loss of excavated clay indicated on the 2015 income statement would be paid back in 2016. UCL managed to pay off the bank loans which amounted to Ugx3Bn ($902,256) [Source: Annual Report 2014] over the past year. However, effects of this payment were overshadowed by accruing interest and penalties arising from payment defaults on the shareholder loan. Back in 2010, Uganda Clays took on unsecured debt from its largest shareholder (with a 32.52% stake), NSSF Uganda, amounting to Ugx11.05Bn ($3.3Mn). This loan attracts an interest of 15% with a loan tenure of 10 years and a 2-year grace period. Owing to the slowdown in business and poor management in recent years, the company has had a difficult time financing this debt. As a result, the loan amount has since grown to about Ugx19.7Bn ($5.9Mn). UCL revealed to its shareholders at last year’s Annual General Meeting that the company was in discussions with NSSF Uganda on a possible conversion of this debt into equity. The results of these discussions are yet to materialize publicly. The company’s cash flows continued to recover with a surge to Ugx1.4Bn ($421,885) by the end of last year, widely boosted by the Ugx3.1Bn ($936,382) received for part of the company’s land in Kajjansi. UCL share price experienced a decelerating trend into the last quarter of 2015. The rumored debt to equity conversion appears to have offered shareholders some optimism which saw the share price rise to its current level of Ugx15 ($0.005) from an all-time low of Ugx13 ($0.004) in mid-October. Currently, there is more demand on the counter than supply as investors anticipate the debt to equity Figure 1: Uganda Clays Ltd Share Price Trend (Year on Year) conversion. Investors should be aware of possible dilution effects in case the proposed debt to Source: Bloomberg, Uganda Securities Exchange (USE) equity conversion is carried out. We issue a HOLD recommendation on the counter owing to sluggish growth in revenues and lack Share Details of public statements from the company with details of the proposed debt to equity conversion. Symbol (Bloomberg) UCL UG Revenues grew at a compounded annual growth rate of 6.3% over the past five years. This is possibly Market USE on the back of rising competition in the clay sector. Furthermore, management revealed that the Last Price Ugx15 plant in Kamonkoli is still performing below capacity which could also be a contributing factor to 52 Week Range Ugx13 – 18 the slow growth of the business. We think that management has done a commendable job so far by mitigating cost of sales that have led to better gross profit margins. With a gross profit of Ugx7.7Bn Year to Date Vol Traded 8,076,025 ($2.3Mn) this year, the company is a little shy of its 5-year record of Ugx11Bn ($3.3Mn) registered Year to Date Turnover Ugx116.6Mn ($35,067.3) in 2010. However, the sustainability of the alternative fuels frequently mentioned by the company Year to date Return 0.00% (coffee husks) remains a concern. Our opinion is that although Uganda Clays is showing signs of Shares Outstanding 900,000,000 recovery, the positive results may be undermined by the growing shareholder loan. Market Capitalization Ugx13.5Bn ($4.1Mn) Table 1 Source: Uganda Securities Exchange (USE), Crested Database FY2015 Highlights: Financial Details (Ugx Mn) 2014 2015 % Change Net loss was reduced to Ugx1.2Bn ($363,084) from 5.2Bn ($1.6Mn) in 2014 on the back of incomes Revenue 22,112 24,111 9.0% from land compensation and higher revenues. Cost of sales fell by 8.5% year on year to Ugx16.4Bn ($4.9Mn) compared to Ugx17.9Bn ($5.4Mn) due to the change to a more affordable firing fuel at Cost of Sales (17,883) (16,366) (8.5%) the large Kamonkoli factory. Operating costs decreased to Ugx5.7Bn ($1.7Mn) from Ugx6.1Bn Gross Profit 4,229 7,745 83.1% ($1.8Mn) in 2014. The company incurred a loss of excavated clay amounting to Ugx1.9Bn ($566,472) Net Loss (5,179) (1,207) (76.7%) due to the ongoing construction of the Entebbe express way. Total Assets 64,788 62,557 (3.4%) Total Liabilities 38,007 36,982 (2.7%) Finance costs were marginally lower to Ugx4.2Bn ($1.3Mn) from Ugx4.5Bn ($1.4Mn) in the previous Shareholders’ equity 26,780 25,575 (4.5%) year mirroring the full payment of the commercial bank loans in December 2015. That said, Table 2 Source: Uganda Clays Ltd Published Financial Statements for FY2015 borrowings (both current and non-current) advanced to Ugx23.2Bn ($7Mn) (FY2014: Ugx22.7Bn (Released on 16.05.2016), Crested Database ($6.8Mn) due to accumulating interest on the shareholder loan. Total Assets dropped 3.4% year on year to Ugx62.6Bn ($18.8Mn) due to reduced property, plant and Ratios 2014 2015 % Change equipment. The company’s trade and other receivables accelerated to Ugx3.1Bn ($923,541) from ROA (8.0%) (1.9%) (6.1%) Ugx1.9Bn ($561,331) with a significant portion towards the UNRA compensation for the excavated ROE (19.3%) (4.2%) (15.1%) Cost to income 140.1% 70.8% (69.3%) clay. Total liabilities slowed to Ugx37Bn ($11.1Mn) compared to Ugx38Bn ($11.4Mn) in 2014 with trade and other payable decreasing further to Ugx4Bn ($1.2Mn) from Ugx5.1Bn ($1.5Mn). Gross Profit Margin 19.1% 32.1% 13.0% Debt to Equity 1.42 1.45 2.1% Shareholders’ equity was down 4.5% from Ugx26.8Bn (8.1Mn) to Ugx25.6Bn ($7.7Mn) by the end of NAV per share (Ugx) 29.76 28.42 (4.5%) EPS (Ugx) (5.75) (1.34) (76.7%) 2015. Revaluation reserves fell to Ugx10.4Bn ($3.1Mn) while retained earnings were slightly higher at Ugx4.5Bn ($1.4Mn). Table 3 Source: Uganda Clays Ltd Published Financial Statements for FY2015 (Released on 16.05.2016), Crested Database Earnings per share progressed to Ugx-(1.34) ($-0.0004) in 2015 from Ugx-(5.75) ($-0.002) in 2014. Net Asset Value per share reduced to Ugx28.42 ($0.0085) (FY2014=Ugx29.76 or $0.009). Return on equity and Return on assets were -4.72% and -1.93% respectively. Debt to equity rose to 1.45 from 1.42 in 2014. UCL’s gross profit margin recorded an upsurge to 32.1% in 2015 compared to 19.1% Exchange Rate: 1$ = Ugx3,325 previously. Final Dividend: The company’s Board of Directors did not recommend payment of a final dividend. * Methodology: We used two models for our valuation. The Capital Asset Pricing Model uses a market risk of (-16.67%), a risk factor of 15.94% and expected return of 16.82%, we get a 1-year target price of Ugx17.52 ($0.005). For the Enterprise Value Methodology, we use the company’s liabilities for the 12 months to December 2015, shares outstanding, the counter’s current market capitalization (current price multiplied by UCL’s total issued and fully paid shares) and the Enterprise Value to Sales ratio for similar companies around the world. This methodology yields a target price of Ugx8.46 ($0.003). Taking an average of the target prices from the two models gives a 1-year target price of Ugx13 ($0.004) which has a downside of 13.33% from UCL’s current price of Ugx15 ($0.005). Recommendation Guide: BUY – Strong Fundamentals; BUY/HOLD - Fundamentals are good, in line with sector performance and guidance; HOLD - Future Outlook remains positive; SELL/HOLD - Substantial Risk to fundamentals, negative outlook and guidance; SELL - Strong Risk on fundamentals DISCLAIMER: The information contained herein is obtained from sources, which to the best of our knowledge are reliable. As such, we are not responsible or liable for any factual errors arising thereof. The opinions expressed herein are ours and are subject to change anytime without notice. CRESTEDCAPITAL Research Team Impala House 1st Floor, Plot 13/15 Kimathi Avenue P.O. Box 31736, Kampala, Uganda Ruth Nabakka [email protected] +256 703 747 421 Tel: +256 312 230900, Hotline: +256 758 230900 José Domingo [email protected] +256 793 459 515 @: [email protected], W: www.crestedcapital.com Salima Nakiboneka [email protected] +256 774 560 681 Dreck Murozi [email protected] +256 775 425 060 .