Cadbury: Falling Earnings Puts Pressure On Price


Monday,July13, 2015 1:47pm / Invest Data Consulting

Brief Profile Cadbury
The business of Cadbury Nigerian Plc dates back to the 1950s when it began as an effort to source cocoa beans while looking for opportunities to serve the local consumer markets with the famous Cadbury products. In the early 1960s the company began packing imported bulk consumer products, but grew quickly into a full-fledged manufacturing outfit.

Cadbury Nigeria was incorporated in January 1965 and became a public company traded on the floor of the Nigerian Stock Exchange (NSE) in 1976.

Today, Cadbury Nigeria manufactures and markets sugar confectionery, food drinks, and food products. The Company also processes cocoa and exports cocoa products via its subsidiary Stanmark Cocoa Processing Company Limited.


In the early 90s, this company was the toasts of investors as a result of its strong performance, consistent release of its earnings to the market and good reward to its shareholders in the form of dividends in cash or script. It however ran into troubled water in the early 2000s, due to falsification of its audited results for the year ended December 30, 2006, released to the investing public. This development led to the exit of many of its top executive and senior management staff. 


The revitalisation of the company by the management team that followed and the successful rights issue to restore the reputation of the company and expand its production capacity to meet demands, yielded result for a short time. The numbers for the period showed that it CN had returned from a negative shareholders fund and indeed distributed dividends. The company seem, however to have gone back to its loss position as reflected in its latest earnings report. 


It should be noted that the manufacturing sector of the economy has been deteriorating on daily basis as revealed by the nation’s GDP figures.

In December, 2013 the board and management of the company displayed lack of commitment to drive value for its shareholders as the company applied for a suspension of its share’s trading in order to effectively complete its share reduction which  returned excess capital of N11.9 billion to shareholders by cancelling two out of every five ordinary shares held. Consequently, it reduced share capital account by an amount equivalent to the par value of the cancelled shares and share premium accounts by about N11.27 billion.


Also, each shareholder received returned capital per cancelled share at N9.50 per share. This increased the value of the shares when it was re-listed at N90.78 from N58.27 on February 20, 2014. After the relisting, the stock price has nosedived to the current of N35.05 due to dwindling performance of the company. The continued change of its majority equity holding in the interest of Cadbury Schweppes Oversees Limited has not helped matters.

Cadbury Five years Performance:
The company’s performance between 2010 and 2014 showed a mild growth with up and down movement on the average of 0.92 per cent increase in sales performance for the period. Its profitability level on yearly basis were up but declined in 2014 with average increase of 5.90 percent for the five years. The management commitment to creating value for its customers and stakeholders have reflected on its numbers, especially in the period under review as the company’s earnings power is undulating. 

Its top line in the last five years has grown by 4.6 per cent from N29.17 billion in 2010 to N30.52 billion, while its profit after tax stood at N1.51 billion after it had recorded a profit high  of N6.02 billion  within the period under consideration from the N1.17 billion posted in 2010. The weak numbers emanating from the company lately has negatively influenced its share price performance on the floor of the Nigerian Stock Exchange since 2014. But the impressive earnings that started rolling in, from 2010, 2011, 2012 and 2013 supported its market value before its share price was reconstructed to push the price up.

The share price was not supported even with the dividend of N1.30 and 65 kobo paid in 2014 and 2015 respectively. On the strength of the company’s business model and the continued investment to expand capacities   there is a bright future for long term investors; but the state of insecurity in the northern region is a cause for concern. The earnings power of the company needs to improve in order to support and reduce the free fall of it share price.

Estimated Performance Ratios
Cadbury earnings per share for the five-years have been undulating without clear direction as reflected in the company earnings power. It profit level have been up but weaken in 2014 for the period under review. The amount earned per share increased from 37 kobo in 2010 to 81 kobo in 2015 after recording a high EPS of 192 kobo in 2013.  The unstable   earnings within the period had reduced   investors waiting period  to  48.71x as at the market value when the report was released, after it had recorded a  P/E ratio of  61.97 times in 2010. Book value during the period slide down from N9.10 to N6.15 indicating that the stock is selling at a high premium regardless of its share reconstruction.

Other performance ratios remained depressed including the profit margin is still pointing at high cost of operations.

Investment Analysis:
Cadbury’s share price has a suffered set back before recovering powerfully to reflect the improving earnings position of the company. However, within the period under review the stock price had hit its low of N10.49 in 2010 and bounced back to its highest ever of N90.78 in 2014 as a result of its relisted price after share construction.

The ups and down price performance of the company within the period under review till now was as a result of it board and management adjustment and seeming improved earnings performance.  In 2010 it posted the first positive earnings of 37 kobo and sustained this in 2011, 2012, 2013 and declined in 2014 with earnings per share of N1.18, N1.10, N1.92 and N0.81 respectively.  Its earnings power for 2012 and 2013 was strong to support payment of dividend. 

Its relatively small outstanding number of share and the holding structure has supported the price not to have falling below the current market value. The first quarter earnings report of the company showed a drop in the top line and loss after tax position to reflect the attack on its target market by the insecurity in the northern region and low disposable income of Nigerians. The company needs to re-strategize to grow its earnings and deliver real value to shareholders by increasing its product lines to compete with others in its industry.

Strengths and Opportunity
The local sourcing of its raw material through its own subsidiary to maintain standard and be available to keep the production process running.  The generating of its own power to sustain the production process, the increased capacity to meet demand, good repackaging of its product, and sales promotion to drive sales all speak good for the company. Management with expertise and good knowledge of domestic and international markets, coupled with a good brand name in its industry are other good factors.

Weaknesses & Threats
Product line very small, the demand of its product is elastic in nature; increasing interest and exchange rates, insecurity in some parts of Nigeria especially the north where it has a strong market, inconsistent policy of the government, increasing cost of sale, reduced purchasing power of many Nigerians, the continual buy and sell of the major stakes of the company by the foreign institutions that have more than 70 per cent interest are some of the company’s weaknesses and threats. The visibility of its products in the market and home is dropping.


The valuation method employed here is the price to earnings ratio. The company’s PE ratio of its full year report of 2014 as at March, 27 2015 was 48.71x which is high with the dwindling earnings.  There is unstable outlook for the economy and the company to influence price.  The possibility of this company’s share to drop lower is high. We recommend sell and watch.


Technical View

Price action of Cadbury has been trending down to reflect its performance and market sentiments. The bearish channel is showing a full distribution in the price of the stock, with the price hitting lower lows. On this note traders and investors are advice to wait and watch out for reversal before any action.  The price action is below its 50 days moving average. 

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