Cadbury Nigeria Plc - Has Q4-2016 Set the Tone for 2017?


Friday, March 31, 2017/4:55 PM /Cordros Capital

Cadbury Nigeria Plc (CADBURY) was the only firm in our universe of consumer goods companies (with December year end) that reported loss after tax in 2016.

The record challenging macroeconomic condition experienced in Nigeria constrained some major milestones (production capacity expansion, introduction of new products, and strengthening of RTM) which management expected to propel earnings from the 46% decline recorded in 2015.

The company’s poor performance centred on the second and third quarters which caught majority of the listed manufacturers unawares -- producers delayed pricing decisions amid spiraling FX-linked costs, and when taken, were quite understated.

Has Q4-16 set the tone for 2017...?

Across the FMCG space, pricing adjustments were both frequent and bold between late September and December 2016, hence the broad outperformance seen with latest results.

As earlier reported, price-driven revenue growth, and consequent improvement in gross margin, made the difference in the N279.3 million PBT (well ahead of consensus) which CADBURY reported during the three months period.

... Perhaps

In continuation from Q4-16, we understand further PI actions have been taken this quarter.

The product in focus was the flagship Bournvita (excluding the 20g sachet), where total per carton price increase ranged from 17% to 37% based on feedback from major distributors.

The price increase was in response to the action taken by NESTLE with respect to Milo (the leading refreshment food drink) earlier this quarter. Note that CADBURY’s effective price increase should be lower than the above quoted range, given that the increases were accompanied with promotional activities -- to offset the impact on demand -- which, in most cases, involved reward with stocks.

Distributors have also been informed that the price of the 20g Bournvita will be increased in April.

We understand that emphasis in 2017 will be on pushing further the above highlighted milestones set in 2015. These include (1) driving efficiency from the newly commissioned, larger Bournvita production facility and (2) strengthening RTM initiative by leveraging on the remodeled sales force scheme to improve visibility of products.

Feedback from distributors on CADBURY’s RTM initiative was positive (see our note:
NESTLE and CADBURY; The Distributor’s Feedback), and we can attest to that from the increasing visibility of Clorets (breath freshening chewing gum), Trident (sugar-free chewing gum), and 3-in-1 Hot Chocolate Drink, across both major retail outlets and “street” vendors.

In a less aggressive inflationary environment relative to 2016, CADBURY appears poised to benefit from price-driven margin enhancement above Q4-16 (27.5%).

While gross margin in Q4-16 was shy of the 30% level we assumed for 2017F, the additional price increases taken this quarter, with further hikes possible into the year, should move margin further to our forecast level.

In addition, we expect the continuous deployment of cost savings measures such as zero-based budgeting to drive margin expansion.

CADBURY’s share price has correlated quite visibly with (1) its worsening earnings, (2) continued lack of communication from management on the efforts to improve performance, and (3) the Nigerian investor negative perception of the company. The stock’s FPE of 15.1x is at discount to both its long term average 29.7x and NESTLE’s FPE of 23.8x.

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