Cadbury Nigeria Q1 2017 Results Review - No change to Neutral rating


Thursday, May 04, 2017 12:55 PM /FBNQuest Research 

9.8% cut to 2017-18E EPS forecasts on average 

Similar to the prior quarter, Cadbury Nigeria (Cadbury) reported an impressive sales growth of 13.3% y/y in Q1 2017, boosted by last year’s price increases and relatively lower competition from imports.

As such, sales were 5.4% ahead of our forecast. However, the bottomline disappointed both on a y/yand q/q basis. Once more, additional pressures on input costs following the devaluation of the naira in 2016 weighed on gross margin.  

Raw material and packaging cost as a proportion of COGS increased by around 900bps y/y to 52% in 2016.  

Although management continues to seek innovative ways to boost profitability, our view is that the firm is limited by the size of its product offerings.  

On the back of the results, we have cut our 2017-18E EPS forecasts by -9.8% on average and lowered our price target to N11.9 from N12.1.  

Our new price target shows a potential upside of 28.3% from current levels. On a relative valuation basis, Cadbury shares are more expensive than its Nigerian peers and have shed -9.6% ytd, underperforming both the sector and the NSE All share index by -5.9% and -6.8%.

A risk to our valuation is a further devaluation of the naira which could have a significant impact on profitability, as was seen last year. We retain our Neutral rating on the stock. 

Gross margin contraction weighed on earnings
Cadbury Nigeria’s Q1 2017 results showed sales growth of 13.3% y/y to N8.1bn. However, PBT declined by -86.2% y/y to a meagre N96m.   

Although operating expenses were -5.6% lower y/y, the PBT was largely impacted by a -1,161bps contraction in gross margin to 21.8%, reflecting increased raw material costs. PAT of N93m decreased by -86.2% y/y, identical to the PBT decline.  

Sequentially, sales fell by -6.7% q/q. Prior quarter sales of N8.7bn were Cadbury’s highest in three years.  

PBT fell by -65.7% q/q due to gross margin contraction of -573bps q/q and a 60.6% q/q rise in net interest expense. PAT declined by -88.7% q/q respectively. 

Near-to-medium term outlook
Although Cadbury has recorded double digit sales growth in the past two quarters, we see a slowdown to this trend in the coming quarters.  

If the CBN continues to improve FX supply as it has done so far in 2017, we reckon that market penetration of imported competition is likely to rise.  

As such, Cadbury’s additional market share could be threatened and the company might be forced to lower product prices.  

As such we expect average sales growth in the single digit range over the 2017-18E period. 



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