Wednesday, October 26, 2016/ 12.45pm /Cordros Capital
Last week (Friday), CADBURY released results for nine months and third quarter ended September 2016.
The key features of the third quarter result are (1) y/y and q/q revenue growth after a disappointing second quarter and (2) elevated cost pressure which more than offset savings on operating expenses and resulted in a LAT.
Combining Q3 with the half year results leaves revenue over nine months of 2016 slightly (1.2%) above 2015 equivalent, but the company declared a loss after tax.
We have revised estimates for CADBURY, considering the (1) price hikes taken late in September and middle of this month; (2) unabating cost pressure which management is unable to fully pass on; and (3) considerable savings in operating expenses.
The recovery of revenue in Q3 was volume driven, given that CADBURY delayed its price increase after a closer competitor – NESTLE – increased the price of its MILO by about 10-15% in July. Since late September however, the price of refreshment beverages (BOURNVITA, accounting for 60% of revenue) has been increased by about 15% cumulatively.
Most distributors expect more PIs would be taken in this category before December. The distributors however confirmed that sales volume has been consequently impacted, and outlook is more to the downside. Overall, we adjust 2016F revenue growth estimate to 5.9% (vs. 6.9%) and retain 2017-2018F growth forecast of +5%.
Insight into the biggest drivers of the surge in CADBURY’s input costs is limited by continued lack of communication from management.
While the company is able to source cocoa powder locally through its wholly owned subsidiary, we understand that this key input has cost components that are linked to the exchange rate. Besides, the prices of sugar and dairy which are also essential inputs are linked to the exchange rate.
Gas supply has not improved our channel checks reveal that some manufacturers have an average 80% diesel (which is indexed to the USD and more expensive than gas) in their energy mix. The NGN lost 9% to the USD in Q3 and most manufacturers see USDNGN of more than N350 before first quarter 2017.
On the positive, CADBURY reported relatively lower opex in each of the three quarters of this year. Hence, we have revised opex estimate much lower than previously forecasted. Much of the savings on opex this year came from administrative costs, especially in the third quarter which coincided with a restructuring exercise that took place within the organization.
We roll forward valuation to 2017 and arrive at N20.71 TP (previously N19.82). While the TP suggests impressive upside from current market value, investors are more likely to remain averse to CADBURY’s shares in the near term considering (1) the likelihood of negative earnings in 2016F; (2) Nigerian investor negative perception of the company; and (3) limited visibility on the efforts of management to improve the performance of the company.
1. CADBURY declares N842.16 million Loss in Q3'16 Result,(SP:N13.82k)