Cordros Research Maintains ‘Sell’ Rating on Cadbury Nigeria

April 29, 2018
Cordros Research Maintains 'Sell' Rating on Cadbury Nigeria

By Dipo Olowookere

One of the leading research investment firms in Nigeria, Cordros Research, has retained its ‘sell’ rating on Cadbury Nigeria Plc.

In its latest report, the company said it was not surprised by the lower PBT posted by Cadbury in its Q1 earnings, which was expected to be impacted by higher finance charges (+233% y/y), given the sizeable balance of borrowings at the beginning of this year, compared to 2017.

Last week, the FMCG company published its Q1-18 result, showing EBIT was higher by 76.2% while PBT was lower by 67.2%, both compared to Q1-17.

The reported PBT missed Cordros’ estimate by 49%, owing specifically to the deviation on finance income line (46% below our estimate), but it expects this to normalize in subsequent quarters.

“We retain our 8% revenue growth for 2018E: Q1-18 revenue grew 2% y/y, consistent with our 1.8% growth estimate. Given base selling price is lower by marginal single-digit, we estimate flat to modest volume contraction must have been recorded during the just concluded quarter, compared to last year.

“Retaining our 8% revenue growth estimate for 2018E suggests we look for a faster growth in subsequent quarters, and will be largely volume-driven, on continued promotional activities, including price discounting.

“We are aware of an ongoing buy-1-get-1 free promo for the 450g Bournvita Hot Chocolate Drink. Our gross margin estimate is also unchanged: At 21.8%, CADBURY’s gross margin in Q1-18 is in line with our 21.9% estimate for the quarter, and 3 bps higher vs. Q1-17.

“We had stated in our last note on the company that we do not expect gross margin will be above the 22.5% rate achieved in 2017FY, and this view is unchanged. Margin headwinds are selling price competition (on stronger imports) and rising cocoa prices, while the tailwinds are stable FX and soft sugar (-28% YtD) and dairy prices (-6% YtD).

“Also, at 2.6%, EBIT margin is in line in Q1-18. Our estimate for 2018E is unchanged at 3.4%, equating to +120 bps vs. 2017FY. Keeping opex under control is an aspect that CADBURY’s management has performed better in recent years of strong pressure on market share and revenue. Opex declined by 2% y/y in Q1-18 while the ratio to revenue was lower by 78 bps. From 20.6% in 2017FY, we estimate opex margin will drop to 19.5% in 2018E, on slower opex growth of 2%, over revenue growth of 8%.

“Balance sheet: The balance of short term borrowings was NGN4.3 billion, from the NGN3.6 billion at the beginning of the year. CADBURY’s loans are expensive (we estimated 22% at the end of 2017FY), and we are not aware that they are being refinanced through commercial papers in this period of generally declining interest rates.

“Finance cost in Q1-18 is in line with our estimate. Finance income was lower, but we expect this would increase and converge with our estimate for the year, as cash grows following the payment of 2017FY dividend,” the report said.

Continuing, Cordros said, “We maintain SELL at NGN10.96 TP. Our estimates are unchanged. On our estimates, CADBURY is trading at 2018F P/E multiple of 61.5x, a significant premium to the 5-year historical average of 31.1x. The stock price is down 6% since our March 20 update.

Dipo Olowookere

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan.

Mr Olowookere can be reached via [email protected]

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