Cadbury Nigeria Plc- We remain sellers even at current price

Proshare

Tuesday, March 20, 2018 /1:55 PM /Cordros 

We update on CADBURY with a TP of NGN10.96 (29% downside) and maintain SELL recommendation. Despite having a challenging 2017FY, contrary to the rest of our consumer goods universe, the company reported a net profit of NGN300 million, from a loss in 2016FY. We forecast net profit to grow by 38% in 2018E, equating to DPS of NGN0.22/share. On our revised estimates, CADBURY is trading at 2018F P/E multiple of 65.6x, a significant premium to the 5-year historical average of 31.1x. 

Modest revenue growth in 2018E: We forecast revenue growth to moderate to 8% in 2018E, from 10.3% in 2017FY. As with the industry, we expect revenue growth this year to be largely volume-driven. And specifically, for CADBURY, we look for management backing sales with a lot of promotional activities, including price discounting, given intense competition, especially in the Food Beverage segment. In this segment, we note from our recent survey of prices that Bournvita is cheaper, on average, compared to Milo by about 12%. The discount (48%) relative to Milo is significant on the fastest-selling 20g SKU. We also think Bournvita price is quite competitive at a premium of about 4% on average, relative to Cowbell. 

Dour gross margin outlook: For us, CADBURY’s gross margin outturn – excluding the one-off spring to 30% in Q3-17 – was impressive in 2017FY. We think this is down to prices, which management needed to keep competitive in order to support revenue. It is our understanding that CADBURY – factoring in discounts also – did not match NESTLE in the rate of price increases in 2016- 2017FY, suggesting to us that some costs must have been absorbed. While we consider the moderating commodities price inflation and stable naira exchange rate outlook as tailwinds, we estimate gross margin to remain flattish at 22.5% in 2018E, below the company’s historical average of 28.3%. 

On the other hand, we forecast EBIT margin to increase to a 2-year high of 3.4%, but still below the 5-year historical average of 7%. Opex has been well-contained in the last two years, including the ratio to revenue which fell to record-low 20.6% last year. We note the consistently lower spending on (1) consultancy and professional fees, (2) advert and promos, and (3) travel and entertainment – in the last two years. We also note savings on personnel expenses (-12% in 2017FY) as part of measures towards resource optimization. 

Balance sheet: A short term loan of NGN1.7 billion was drawn in Q4, bringing the balance of expensive short term borrowings (we estimate at average interest rate of 22%) to NGN3.6 billion as at end-2017FY. Although we project finance costs will be higher relative to 2017FY, we expect borrowings will be lower by end-2018E, as the sizeable settlement of trade payables in Q4-17 frees new cash for debt repayment.

Proshare Nigeria Pvt. Ltd.

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