CADBURY NIGERIA PLC. Tough Operating Environment Remain Achilles heel of Nigeria s Top Chocolate & Confectionary Maker 21 OCTOBER, 2015
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- Rudolf Kennedy
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1 CADBURY NIGERIA PLC Tough Operating Environment Remain Achilles heel of Nigeria s Top Chocolate & Confectionary Maker 21 OCTOBER, 2015 Cadbury Nigeria Plc ( CADBURY ), a subsidiary of Mondelez International, yet again posted a disappointing performance scorecard, showing revenue decline of 9.61% YoY to NGN21.073bn in Q3:2015 (vs. NGN23.313bn Q3:2014). This result marked the 7th consecutive quarter of revenue decline since FY:2013. We attribute this persistent lack lustre performance to insecurity and the unfavourable macro-economic environment which pressured disposable income downwards while also dampening business expansion activities in the review period. We do not expect a significant change in the trend in revenue for the rest of the year. Our FY:2015 revenue target is NGN26.76bn, (vs. NGN30.52bn, FY:2014), implying a 12.30% contraction in sales from previous period. Despite the drag in sales, Cost-to-Sales and OPEX ratios inched higher YoY, for the third consecutive time this year, resulting in marked declines in profitability margins. Given the current level of earnings, and our expectations for Q4:2015, we estimate a FY: 2015 PAT of NGN0.56bn, down 69.24% from the previous year. On the back of this, we forecast net margin to settle at 2.07% relative to 5.94% in FY: Following a review of our valuation assumptions to reflect current economic and company realities, our FY:2015 target price dropped to NGN21.38bn, implying a 2.80% downside potential from the current price of NGN We therefore recommend a HOLD. Revenue Growth Largely Constrained: Since FY:2013, CADBURY has maintained a steady downward trend in revenue. In the recently released scorecard for Q3:2015, revenue dipped by 9.61% YoY to NGN21.073bn. In our view, the sustained drag in sales performance is as a result of the company s comparatively lean product portfolio (Bournvita, Tom-Tom, Buttermint, AFC salted crackers and Tang drink), stiff competition facing its flagship product (Bournvita) in the market place, as well as the harsh economic environment (foreign and domestic). In response to threats to the company s market share and top-line performance, CADBURY s management announced plans to focus on its powdered-drink and candy categories, while also increasing investments in product/process innovation and business strategy enhancement in order to retain its share of the market and also drive growth potential. CADBURY s parent company (Mondelez International) recently invested USD50m into expanding the company s production capacity for Bournvita brand, which we expect to bode well for the company revenue growth in the medium term. Also, we imagine that the company s robust route to market network will aid its renewed strategy going further. Rampant Costs Further Pressure Margins: CADBURY is on the brink of giving up its record as the most cost-efficient company in the food and beverages sector which it earned upon acquisition of a majority stake in Stanmark Cocoa Processing Company s Plc, a Cocoa manufacturing company in Cost to Sales ratio expanded YoY by 6.97% in Q3: 2015 to 69.62% (vs. 2014: 62.65%) compared to industry average of 76.77%. We expect this trend in cost level to subsist for a while, given the economic situation in the country. Similarly, OPEX ratio hiked by 2.98% in Q3 to 30.29% relative to the previous year s level of 27.30%. Therefore, Earnings after tax dragged by 98.27% YoY to NGN0.029bn in Q3:2015, and Earnings Margin to 0.14% relative to 7.09% in the comparable year. Consequently, we estimate FY: 2015 Earnings margin of 2.07% and 5year average forecast of 6.43% from FY: 2015 to FY: Q3: 2015 EARNINGS UPDATE Relative Metrics Current price P/E ttm 72.35x P/B 3.43x Div. Yield 1.38% 52-Wk av. Vol (mn) Fundamental Metrics EPS 0.30 BVPS 6.23 Net Margin 2.07% ROAE 4.74% ROAA 1.95% ttm Asset Turnover 0.94x Financial Leverage 2.43x Mkt. Cap (N bn) Key Price Metrics Today Return 0.00% WtD Return -0.77% MtD Return -8.33% QtD Return -8.33% YtD Return 45.00% 52-Week Return % 52-Week Hi Week Lo Year Hi Year Lo Beta D-RSI CADBURY 0 2-Jan-13 2-Jan-14 2-Jan-15 Analyst: Chiamaka Nwobi NSEASI chiamakanwobi@meristemng.com Based on the foregoing, we do not expect the company to pay dividend in FY: 2015, hence, making it the second consecutive year of dividend drought. 1 P a g e
2 We Reviewed Our Valuation Assumptions: Our valuation methodology for CADBURY is a blend of both DDM and relative valuation methodologies. Whilst we remain conservative in our outlook for the company, we reviewed our assumptions in the light of current economic realities and CADBURY s performance. We arrived at our 2015FY target price of NGN21.38 compared to the previous target price of NGN37.25, implying a downside of 2.80% to the current market price of NGN22.00, therefore we place HOLD. Financial Highlights (NGN billion) CADBURY NIGERIA PLC Q3:2015 Profit & Loss Account Q3:2015 Q3:2014 FY:2015 Revenue Cost of Sales Gross Profit OPEX Finance Income PBT PAT Balance Sheet Inventories Debtors/Receivables Cash and bank Other Assets Total Assets Trade and other Payables Employee Benefits Total Liabilities Shareholders' fund Per share data CADBURY Current Price Trailing EPS BVPS 7.33 Price multiples/ratios Shares Outstanding 1.88 P/E nm P/BV 3.00x RoAE 0.26% RoAA 0.10% Financial Leverage 2.68x 2.50x Cost of Sales Margin 69.62% 62.65% Gross Profit Margin 30.38% 37.35% OPEX Ratio 30.29% 27.30% Net margin 0.14% 7.09% 2 P a g e
3 Analyst s Certification and Disclaimer This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the cover of this report. Each research analyst hereby certifies, with respect to each security or issuer covers in this research that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers (the Issuer); and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Research analysts compensation is determined based upon activities and services intended to benefit the investor clients of Meristem Securities Limited (the Firm). Like all of the Firm s employees, research analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the Firm. (3) each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting non-material non-public or material public market information. As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a judgment, and are not connected to research analysts compensations. In the case of non-currency of the date of this report, the views and contents may not reflect the research analysts current thinking. This document has been produced independently of the Issuer. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the ratings, forecasts, estimates, opinions and views contained herein are fair and reasonable, neither the research analysts, the Issuer, nor any of its directors, officers or employees, shall be in any way responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking. Investment Ratings Fair Value Estimate We estimate stock s fair value by computing a weighted average of projected prices derived from discounted cash flow and relative valuation methodologies. The choice of relative valuation methodology (ies) usually depends on the firm s peculiar business model and what in the opinion of our analyst is considered as a key driver of the stock s value from a firm specific as well as an industry perspective. However, we attach the most weight to discounted cash flow valuation methodology. Ratings Specification BUY: HOLD: SELL: Fair value of the stock is above the current market price by at least 20 percent Fair value of the stock ranges between -10 percent and 20 percent from the current market price. Fair value of the stock is more than 10 percent below the current market price. Definitions Price Targets: Price targets reflect in part the analyst s estimates for the company s earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or market, and may not occur if the company s earnings fall short of estimates. Asset allocation: The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable. 3 P a g e
4 Movements in Price Target Company Name: Cadbury Nigeria Plc Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 21/10/ BUY HOLD New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company Cadbury Nigeria Plc Disclosure a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. Conflict of Interest It is the policy of Meristem Securities Limited and its subsidiaries and affiliates (Individually and collectively referred to as Meristem ) that research analysts may not be involved in activities that suggest that they are representing the interests of Meristem in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in Meristem s Investment Banking or Sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analysts published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests. 4 P a g e
5 Important Disclosure For U.S. persons only: This research report is a product of Meristem Securities, which is the employer of the research analysts who has prepared the research report. The research analysts preparing the research report are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analysts are not subject to supervision by a U.S. broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Mersitem Securities only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Meristem Securities has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. Legal entity disclosures Meristem Securities Limited is a member of The Nigerian Stock Exchange and is authorized and regulated by the Securities and Exchange Commission to conduct investment banking and financial advisory business in Nigeria. However, the company through its subsidiaries carries out stock broking, wealth management, trustees and registrars businesses which are regulated by the SEC and ICMR. 5 P a g e
6 Contact Information Brokerage Services ( ) Investment Banking/Corporate Finance ( ) ( ) Wealth Management ( ) ( ) Tel: Registrars ( ) Tel: Trustees ( ) Tel: Client Services ( ) Investment Research ( ) ( ) Tel: Corporate websites: Meristem Research can also be accessed on the following platforms: Meristem Research portal: meristem.com.ng/rhub Bloomberg: MERI <GO> Capital IQ: ISI Emerging Markets: Reuters: FactSet: 6 P a g e
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Growth led by Enterprise Retain BUY October 26, 20 Govind Agarwal govindagarwal@plindia.com +91 22 66322300 Hussain Kagzi hussainkagzi@plindia.com +91 22 66322242 Rating BUY Price Rs669 Target Price Rs780
More informationBharat Forge. Exports remain subdued, outlook better. Source: Company Data; PL Research
Exports remain subdued, outlook better November 08, 2016 Rohan Korde rohankorde@plindia.com +91 22 66322235 Rating BUY Price Rs850 Target Price Rs957 Implied Upside 12.6% Sensex 27,591 Nifty 8,544 (Prices
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Strong inflow growth, renewable/railways key drivers October 28, 2016 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Samir Bendre samirbendre@plindia.com +91 22 66322256 Rating Accumulate Price Rs1,063
More informationCoal India. Source: Company Data; PL Research
Lower costs and higher scale off sets weaker realisations February 12, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs305
More informationEicher Motors. Continues to ride high! Accumulate. Source: Company Data; PL Research
Continues to ride high! Accumulate November 14, 2017 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs30,083 Target
More informationIndraprastha Gas. Growth traction continues. Source: Company Data; PL Research
Growth traction continues June 28, 216 Avishek Datta avishekdatta@plindia.com +91 22 66322254 Rating BUY Price Rs65 Target Price Rs632 Implied Upside 4.5% Sensex 26,43 Nifty 8,95 (Prices as on June 27,
More informationSBI Life Insurance Company (SBILIFE IN ) Rating: BUY CMP: Rs673 TP: Rs840
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More informationOkomu Oil Palm Plc. Lower revenues, higher costs weaker profits. Equity Research PZ Cussons Nigeria. Nigeria Equities Consumer Goods December
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More informationPunjab National Bank
Slippages remain high despite high recoveries May 22, 2017 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com
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Jan-14 Mar-14 Apr-14 May-14 Jul-14 Aug-14 Sep-14 Nov-14 Dec-14 Jan-15 India Research Infrastructure April 10, 2015 EVENT UPDATE Bloomberg: IN Reuters: HCNS.BO BUY QIP step in the right direction has successfully
More informationAsian Paints. Source: Company Data; PL Research
Premium Valuations to sustain, Accumulate May, 17 Amnish Aggarwal amnishaggarwal@plindia.com +91 Gaurav Jogani gauravjogani@plindia.com +91 8 Rating Accumulate Price Rs1,18 Target Price Rs1,171 Implied
More informationHindalco Industries. Source: Company Data; PL Research
Beats its own best; building up for next leg of growth May 08, 2018 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Amit Khimesra amitkhimesra@plindia.com +91 22 66322244 Rating BUY Price Rs239
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More informationBHEL.BO BHEL IN. Structural story remains weak. Q1FY19 Result Update. Rating: REDUCE CMP: Rs72 TP: Rs73. July 25, 2018
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More informationThermax. Source: Company Data; PL Research
Near term outlook muted, working on building a strong base November 11, 2016 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Samir Bendre samirbendre@plindia.com +91 22 66322256 Rating Accumulate Price
More informationCrompton Greaves Consumer Electricals (CROMPTON IN) Rating: BUY CMP: Rs195 TP: Rs276
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More informationJindal Steel & Power
Good show in tough environment; well placed for long term BUY May 05, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating Accumulate Price
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(LT IN) Rating: BUY CMP: Rs1,321 TP: Rs1,566 July 25, 2018 Company Report Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating BUY BUY Target Price 1,566
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Sustains momentum; Input cost gains peaked out November 09, 2015 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating Accumulate Price
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More informationICICI Prudential Life Insurance
Margins were positive surprise; APE growth was slow January 21, 2018 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com
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Strong performance, but loan growth key to sustainability in earnings July 18, 2016 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah
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Strong growth, reasonable valuations August 16, 2017 Madhu Babu madhubabu@plindia.com +91 22 66322300 Rating BUY Price Rs160 Target Price Rs200 Implied Upside 25.0% Sensex 31,771 Nifty 9,897 (Prices as
More informationNavneet Education. ILL loss hurts consolidated earnings growth. Source: Company Data; PL Research
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Good show...but tread carefully ; Accumulate November 09, 2017 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs440
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More informationMphasis. Source: Company Data; PL Research
Setting path for growth in Direct Channel, Retain Accumulate June 18, 2015 Shashi Bhusan shashibhusan@plindia.com +91 22 66322300 Hussain Kagzi hussainkagzi@plindia.com +91 22 66322242 Rating Accumulate
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Expansions on schedule; lower costs to aid margins June 28, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs385 Target
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