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Equity Research Report - Cadbury Nigeria Plc - 240311




March 25, 2011
Cadbury Nigeria Plc (Cadbury) is engaged in the manufacture and sale of branded fast moving consumer goods and processing of cocoa to butter, powder, liquor and cake. It sells its products in the Nigerian market, West Africa and South Africa. Cadbury Nigeria Plc is a subsidiary of Cadbury Plc, incorporated in the United Kingdom.
Cadbury Plc, through Cadbury Schweppes Overseas Limited (CSOL), held 75% of the issue and fully paid share capital of the company as at December 2009. The remaining 25% is held by Nigerian individual and institutional shareholders. The increase in the shareholding of CSOL occurred following the 2009 Rights Issue in which CSOL took up its rights in full and applied for additional shares, demonstrating its commitment to the Company’s future.
In February 2010, Kraft Foods Incorporated, a firm founded in Illinois, United States in 1903, completed the takeover of Cadbury Plc when the shareholders approved to purchase 71.7% of the firm at a value of US$18.9bn. The acquisition of the parent company of Cadbury Nigeria Plc may mean a change of name for Cadbury Nigeria Plc and introduction of new products into the Nigerian market, to meet the growing needs of customers.
It is unclear if Kraft Foods will opt for delisting of Cadbury Nigeria from the NSE, following the acquisition. Cadbury has a majority shareholding of 93.25% in Stanmark Cocoa Processing Company Plc (SCPCL) located in Ondo State. SCPCL produces a range of intermediate products such as cocoa butter, liquor and powder. The cocoa butter and liquor are exported to a wide range of international customers, while the cocoa powder is consumed locally. Cadbury Nigeria Plc’s entire cocoa powder requirement is sourced from SCPCL. It also exports to Cadbury Ghana Ltd and Cadbury South Africa.
Applying two valuation methods to value the shares of Cadbury; we arrived at a fair value of N32.16 per share. We estimate a dividend per share of N0.52 for FY 2010 based on dividend payout of 75%. Buying the stock at the current market price of N25 and the price appreciates to our fair value of N32.16 and adding the present value of the 5-year forecast dividend, investors will record a total gain of 42.05%. Relating this gain to the cost of equity, estimated by CAPM, of 16.71%, investment in Cadbury shares at the current market price will record an alpha return of 25.34%. The 2010 estimated earnings yield based on our fair value generates 2.17%, while the 2010 estimated Dividend Yield based on N0.52. Dividend Per Share at our fair value generates 1.63%.
Although the estimated earnings and dividend yield for 2010 are low, we believe that the future of Cadbury in the Nigerian market is bright and the company is well positioned to take advantage of the ensuing opportunities in the market.
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