Equity Research Consumer goods Initiating coverage Nigeria 29 September 2015 Rating - new NEUTRAL Rating old n/a Price (N) 24.0 Price target (N) new 25.2 Price target (N) old n/a Up/downside potential +4.8% Market cap. (Nbn / US$m) 45 / 226 Bloomberg CADBUBY.NL Reuters CADBURY.LG Free float 74.5% Kingston Nwosu +234 703 305 7193 kingston.nwosu@fbncapital.com Uwadiae Osadiaye, CFA +234 703 305 7541 uwadiae.osadiaye@fbncapital.com Team +234 708 065 3174 research@fbncapital.com Share price performance (N) 120 100 80 60 40 20 0 2012 2013 2014 2015 Cadbury Nigeria ASI Rebased % YTD 1M 3M 12M Absolute -40.0-1.0-31.7-54.3 vs. Sector -31.3-19.3-15.7-21.6 vs. NSE -28.8-21.3-24.2-29.7 Source: Bloomberg, FBN Capital Research Company description Cadbury Nigeria Plc was founded in the 1950s initially to source cocoa beans from Nigeria. In the 1960s, an initial operation was established to repack imported bulk products. It was incorporated as Cadbury Nigeria Limited in 1975 and was listed on the Nigerian Stock Exchange in 1976. It manufactures consumer products in 3 different segments beverages, confectionery and intermediate goods. Cadbury Nigeria Waiting for topline growth to pick up Neutral rating; upside limited: We are initiating coverage on Cadbury Nigeria (Cadbury) with a Neutral rating and a price target of N25.2, implying just a 4.8% upside potential from current levels. The company is a leader in the fast moving consumer goods space. Its main brands, Bournvita and TomTom, are household names and command a significant market share in the beverage and confectionery segments respectively. We forecast flattish sales and mid-single digit PBT growth on average over the 2015-2017E period as we continue to see limited room for unit volume growth. The shares are trading on a 2015E P/E multiple of 44.5x for EPS growth of 23.2% in 2016E (boosted by base effects), compared with 34.3x for 11.9% EPS growth for Nestle Nigeria. Headwinds visible of recent due to consumer spend squeeze: After a string of losses from 2006 to 2009, exacerbated by an internal crisis and financial misappropriations which led to the suspension of its shares, Cadbury recovered to record profitability in 2010. More recently however, over the last two years the company has been affected by a squeeze on consumer disposable incomes. H1 2015 sales declined -7.7% y/y leading to losses on the PBT and PAT lines as gross margins contracted by -616bps y/y, operating expenses rose 10% y/y and interest income fell -79% y/y. Relying more on efficiency gains than volume growth: Cadbury s peers have also reported weak results. Unilever Nigeria, UAC of Nigeria Foods and Nestle Nigeria all recorded PBT declines in H1 2015. Although Cadbury has attempted to offset some of the headwinds with new product introductions/re-launch (Tang, Buttermint, Cadbury Hot Chocolate 3-in-1 drink and TomTom varieties), its full offering is still limited compared with peers. While management has struggled to boost the topline meaningfully, it has been relatively more successful with cost reduction: Bournvita s cocoa requirement is 100% sourced locally. To become positive on the shares, we would need to see signs that growth is likely to pick up, over and above efficiency gains. Financials and valuation metrics (Dec YE); N millions except otherwise stated N m unless otherwise 2014A 2015E 2016E 2017E Sales 30,519 28,382 28,950 30,108 PBT 1,467 1,192 1,469 1,634 PBT margin 4.8% 4.2% 5.1% 5.4% EPS adjusted (N) 0.81 0.54 0.66 0.73 EPS growth (Y/y) -58.2% -33.0% 23.2% 9.9% P/E 29.8x 44.5x 36.1x 32.8x EV/OP 39.3x 53.5x 39.9x 34.4x Dividend yield 5.4% 2.0% 2.5% 2.7% Source: Company data, FBN Capital Research estimates FBN Capital Limited (a subsidiary of FBN Holdings Plc) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as one factor in making their investment decision. PLEASE SEE IMPORTANT DISCLOSURES BEGINNING ON PAGE 19. www.fbncapital.com FBN Capital Limited 16-18 Keffi Street, Off Awolowo Road, S.W. Ikoyi, Lagos, Nigeria Tel +234 (1) 2798300; Email info@fbncapital.com An FBN Holdings Company RC 446599
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Contents Valuation and recommendation 5 Relative valuation 6 Valuation methodology 7 Historical sales trend 9 Product portfolio and brand offerings 10 Margins 11 Balance sheet and cash flow trends 13 Recent earnings and outlook 14 Analyst(s) certification and disclosures 19 Prices of securities and index levels in this report are as of close of business on Monday, 28 September 2015 unless otherwise stated. N/US$ conversions are based on a rate of 199.05. 29 September 2015 3
[Notes] 29 September 2015 4
Valuation and recommendation Cadbury Nigeria s share price performance has shown significant volatility since 2010, both in absolute terms and relative to the NSE All Share Index. On average, it outperformed the index by 65% between 2010 and 2013. In 2014, the stock shed - 59%, 43% worse than the -16% loss by the ASI. Ytd the shares are down -40% vs - 11% for the ASI and -17% for its main rival, Nestle Nigeria. The latter is more resilient because of its stronger historical track record, bolstered by a more diversified product offering. Cadbury Nigeria share performance vs the NSEASI (%) 200% 150% 100% 50% 0% -50% 2010 2011 2012 2013 2014 YTD -100% NSEASI Cadbury Nig. Source: Bloomberg, FBN Capital Research After selling-off by an average of -31% in 2014, our broader universe of consumer goods names has shed a further -11% ytd, less than Cadbury s -40%. The sell-off has been underpinned by a number of factors, the most significant being weak investor sentiment driven by a deteriorating macro outlook following the sustained fall in crude oil prices. These, combined with fears of another round of currency devaluation, (after the 22% devaluation of the naira between Q4 2014 and Q1 2015) have led to reduced investment inflows by offshore investors. The ratio of offshore to domestic equity transactions on the Nigerian bourse fell to 56:44 as the end of August 2015 from 81:19 in August 2014. ASI and share price performance summary Share price performance 52Wk high 52Wk low 1M (%) 3M (%) 6M (%) 12M (%) YTD (%) 2014 (%) NSE ASI 41,272.90 27,395.73 2.2-8.5 3.5-24.7-11.9-16.1 Company 52Wk high 52Wk low 1M (%) 3M (%) 6M (%) 12M (%) YTD (%) 2014 (%) NB 185.0 108.1 16.7-6.6 6.5-20.0-15.3-1.5 Guinness Nig. 215.0 106.0 29.4-6.0 19.4-11.5-8.4-28.8 IntBrew 32.0 16.2-3.3-9.8-0.8-37.1-23.6-18.6 PZ Cussons Nig. 35.0 16.6-12.2-17.6 7.2-21.2 10.1-33.4 Unilever Nig. 49.2 27.0 15.0 1.8 35.3-4.7 28.5-33.5 Cadbury Nig. 54.0 21.9-16.0-35.1-38.8-54.3-40.0-51.4 DSR 8.5 4.7 14.8-1.4 13.3-14.8 8.7-45.7 Flour Mills of Nig. 64.1 20.4-12.2-35.3-30.9-64.5-43.6-50.4 Nestle Nig. 1102.5 743.0-13.1-1.2 2.4-21.5-17.0-15.7 UAC of Nig. 58.0 26.0-18.9-28.6-12.3-47.5-11.8-49.3 Consumer sector average 0.0-14.0 0.1-29.7-11.2-32.8 Source: Bloomberg, Company data, FBN Capital Research 29 September 2015 5
Relative valuation Most stocks within our coverage universe are trading very close to their historical trough P/E multiples. Cadbury, Unilever Nigeria (Unilever) and Flour Mills of Nigeria (FMN) which trade close to their peak P/E multiples are exceptions. Cadbury s current 2015E P/E of 44.5x compares with a peak P/E multiple in 2013 of 59.7x and an average of 48.2x between 2010 and 2014. Excluding the outliers, the average P/E multiple for our universe has contracted by -25.6% to 22.9x currently from the 30.8x average that they were trading on in 2013. UAC of Nigeria and Dangote Sugar Refinery (DSR) have been hit the most, with multiple contractions of almost 40% from their 2013 average multiples. At the other extreme, the more resilient names like Nestle Nigeria (Nestle) and PZ Cussons Nigeria (PZ) saw modest multiple declines of -10.1% and -17.4% to 32.7x and 25.7x respectively. The average multiples for the three brewers that we cover, i.e. Guinness Nigeria (Guinness), International Breweries (IntBrew) and Nigerian Breweries (NB) declined by between 24.0% and 25.5% to 25.2x. 28.2x and 25.8x respectively. These compare with the over 30x P/E multiples that most of these names were trading on around the 2013-14E period. In contrast, Cadbury s 44.5x 2015E P/E multiple shows an expansion of 257% from the 12.5x P/E it was trading on in 2013, largely due to a fall in earnings. Historical P/E multiples Average P/E multiple (x) for our consumer universe 150.0 120.0 90.0 60.0 35.0 33.0 31.0 29.0 27.0 20.8x 20.2x 24.7x 33.2x 33.2x 30.0 0.0 Nestle Nig Guinness Nig* IntBrew Nigerian Brew Unilever Nig PZ Cussons Nig* DSR FMN UACN Cadbury Nig 5-yr peak P/E (x) 5-yr trough P/E x Curent P/E (x) 25.0 23.0 21.0 19.0 17.0 15.0 30.8x 2010 2011 2012 2013 2014 2015E Source: Bloomberg, FBN Capital Research Source: Bloomberg, FBN Capital Research Valuation for Cadbury s peers look attractive when multiples are viewed in isolation. However, taken together with earnings growth, we believe that the multiples largely mirror the anticipated slowdown in earnings momentum. On average, we expect the ten consumer goods names (including Cadbury) that we cover to deliver an average EPS decline of around -15.2% in 2015E. While we expect the average earnings growth to improve in 2016E to 23.4%, the expected growth is on the back of significantly weaker comparables in 2015E. We expect the group to deliver a modest average EPS growth of just 1.4% over the next two years. 29 September 2015 6
EPS growth profile 2015 16E 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% Nestle Nig Guinness Nig* IntBrew Nigerian Brew Unilever Nig PZ Cussons Nig* DSR FMN UACN Cadbury Nig. EPS gr. 2015/14 EPS gr. 2016/15 Source: Bloomberg, FBN Capital Research, *PZ is end-may Earnings growth for the consumer companies continue to constrained by weak discretionary spend as consumers down-trade to cheaper substitutes. Gross margins have contracted on the back of higher raw material costs following the -22% devaluation of the naira vs. the US dollar between Q4 2014 and Q1 2015. Furthermore, companies with a large proportion of fx-denominated loans such as Nestle Nig. and IntBrew also saw a significant rise in interest expense. Valuation summary: FBN Capital coverage universe P/E (x) P/E (x) Price Target Price Potential Up/ Mkt Cap Mkt Cap EV/Sales EV/EBITDA FY FY EPS gr. BREWERIES YE Rating (N) (N) Downside (N m) (US$ m) (x) 2016 (x) 2016E 2015E 2016E 2016/ 15 Guinness Nig. Jun N 136.5 155.0-11.9% 233,412 1,173 1.6 7.8 25.3 19.5 29.7% NB Dec N 106.4 146.0-27.2% 1,157,946 5,817 3.8 11.0 26.9 22.4 20.3% International Breweries Mar N 17.8 17.9-0.2% 58,802 295 2.8 7.9 28.2 24.3 15.8% AVERAGE -13.1% 483,387 2,428 2.7 8.9 26.8 22.1 21.9% CONSUMER GOODS YE Rating Price Target (N) Price (N) Potential Up/ Downside Mkt Cap (N m) Mkt Cap (US$ m) EV/Sales (x) 2016 EV/EBITDA (x) 2016E P/E (x) FY 2015E P/E (x) FY 2016E EPS gr. 2016/ 15 DSR Dec N 6.8 6.9-2.1% 82,920 417 0.7 3.1 6.8 6.4 6.5% FMN Mar N 21.4 22.0-2.7% 57,786 290 0.6 5.9 n/a 34.5 n/a Nestle Nig. Dec UP 650.0 859.7-24.4% 681,445 3,423 4.5 17.5 34.3 30.7 11.9% UACN Dec OP 52.4 31.5 66.2% 60,507 304 1.3 5.9 16.4 9.2 79.0% Cadbury Nig. Dec N 25.2 24.0 4.8% 45,072 226 1.6 15.8 44.5 36.1 23.2% PZ Cussons Nig. May UP 16.5 27.2-39.5% 107,998 543 1.4 12.4 27.5 26.3 4.7% Unilever Nig. Dec UP 21.6 45.8-52.8% 173,275 871 3.2 26.3 149.1 124.5 19.8% AVERAGE -7.2% 172,715 868 1.9 12.4 46.4 38.2 24.2% Source: Bloomberg, Company data, FBN Capital Research Valuation methodology Our N25.2 price target for Cadbury is derived using a DCF model over the 2016-2026 period. Our model assumes long-term sales growth of 8% and a terminal EBIT margin of 25%, both of which we assume are reached in a linear trajectory from our 2019E estimates. Our DCF model makes use of a WACC (and COE since Cadbury has no debt) of 19.4%. Our WACC/COE is driven by a beta of 0.6, a risk 29 September 2015 7
free rate of 15.5% and an equity risk premium of 6.5%. From current levels, we see upside of 4.8% for Cadbury shares, hence our Neutral rating. Cadbury Nigeria price target derivation (DCF) 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2065E Estimate Term. Year Revenue 28,950 30,108 31,613 33,194 34,996 37,046 39,374 42,018 45,019 48,428 52,302 Revenue growth 2.0% 4.0% 5.0% 5.0% 5.4% 5.9% 6.3% 6.7% 7.1% 7.6% 8.0% 8.0% 2026 EBIT 1,138 1,303 1,429 1,532 2,634 3,867 5,257 6,834 8,633 10,697 13,076 EBIT margin 3.9% 4.3% 4.5% 4.6% 7.5% 10.4% 13.4% 16.3% 19.2% 22.1% 25.0% 25.0% 2026 Dep & Amort 1,736 1,720 1,713 1,716 1,600 1,473 1,332 1,171 986 773 523 Dep % of sales 6.0% 5.7% 5.4% 5.2% 4.6% 4.0% 3.4% 2.8% 2.2% 1.6% 1.0% 1.0% 2026 EBITDA 2,874 3,022 3,142 3,247 4,235 5,341 6,589 8,004 9,619 11,469 13,599 Capex (1,592) (1,656) (1,739) (1,992) (1,821) (1,643) (1,454) (1,252) (1,032) (790) (523) Capex to sales -5.5% -5.5% -5.5% -6.0% -5.2% -4.4% -3.7% -3.0% -2.3% -1.6% -1.0% Capex / dep -91.7% -96.3% -101.5% -116.1% -113.8% -111.5% -109.2% -106.9% -104.6% -102.3% -100.0% -100% 2026 Change in WC (207) (299) (297) (298) 740 820 920 1,043 1,194 1,378 1,601 Associates - - - - - - - - - - - Taxes paid (220) (261) (282) (298) (515) (758) (1,035) (1,351) (1,713) (2,131) (2,615) FCF 854 806 825 660 2,639 3,760 5,019 6,445 8,068 9,926 12,061 8% PV of FCF 854 675 579 388 1,298 1,549 1,732 1,863 1,953 2,012 2,048 19,403 Net debt WACC assumptions and computation EV adjustments Risk-free rate 15.5% After-tax cost of debt 0.00% Equity value Beta 0.60 Equity/total capital 100.00% Value per share Equity risk premium 6.5% Debt/total capital 0.00% Up/Downside (%) Cost of equity 19.4% WACC 19.4% Working capital (5,233) (5,532) (5,829) (6,127) (5,387) (4,567) (3,647) (2,604) (1,410) (32) 1,569 - WC % of sales -18.1% -18.4% -18.4% -18.5% -18.1% -12.3% -9.3% -6.2% -3.1% -0.1% 3.0% 3.0% 2026 Tax rate -19.4% -20.1% -19.7% -19.5% -19.4% -19.6% -19.7% -19.8% -19.8% -19.9% -20.0% -20.0% 2026 Source: FBN Capital Research estimates 29 September 2015 8
Historical sales trend After falling -34.8% y/y in 2006, Cadbury s sales grew over the next five years. Growth averaged 12.8% y/y between 2007 and 2008 before slowing down in 2009 to 5.3% as a result of the global crisis. It picked up afterwards and averaged 15.5% y/y between 2010 and 2011 as the economy recovered. In 2012, like other consumer names, Cadbury s sales were affected by the partial removal of fuel subsidies, the increase in electricity tariff, floods (Q3 2012) and security challenges in northern Nigeria. As a result, sales dipped by -1.6% y/y. After a recovery in 2013, growth turned negative in 2014 due to the slowdown in consumer spending due to deteriorating macroeconomic conditions as well as intense competition. Cadbury Nigeria sales growth trend 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 30% 20% 10% 0% -10% -20% -30% -40% Sales (N'm) Sales growth (y/) Source: Company data, FBN Capital Research Relative to peers such as Nestle Nigeria, UAC Foods, PZ Cussons Nigeria and Unilever Nigeria, Cadbury s sales growth trailed competition between 2006 and 2011: its average sales growth of 5% over that period compared with double digits for competition. Although sales growth for the sector slowed down between 2012 and 2014, it was only Cadbury that recorded a y/y decline (on average) over the period. Cadbury Nigeria sales growth trend vs competition 40% 20% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014-20% -40% Nestle UAC Foods PZ Cussons * Unilever Cadbury Source: Company data, FBN Capital Research; *PZ Cussons is end-may, others are end-dec We suspect that Cadbury s limited product offering is partly responsible for this performance. More recently in 2014, the company launched Cadbury Hot Chocolate 3 in 1 Drink and re-launched Cadbury Buttermint. Our checks reveal that biscuits and gum will be introduced in the short to medium term. We however doubt that these will provide enough scale to compete favourably with the larger consumer names. 29 September 2015 9
Product portfolio and brand offerings Cadbury Nigeria manufactures and distributes products under three broad-based categories - refreshment beverages, confectionery and intermediate cocoa products. In 2014, beverages which include Bournvita and TANG (launched in 2012) generated 56% of total sales. The main brands in confectionery are TomTom varieties and Buttermint; this segment accounted for around 31% of sales while intermediate cocoa products which represent other derivatives from cocoa accounted for 13% of sales. Cadbury Nigeria sales breakdown Intermediate Cocoa Products 13% Confectionery 31% Refreshment Beverages 56% Source: Company data, FBN Capital Research estimates The derivative products, cocoa butter and liquor, are usually exported. Prior to 2013, Cadbury sourced its entire cocoa powder requirement from its former cocoa processing subsidiary, Stanmark Cocoa Processing Company Limited (SCPCL). Cadbury and SCPCL were merged in 2013. In the beverage category, Milo, Nestle s chocolate drink, and Cadbury s Bournvita are the dominant brands. Milo is the market leader. Having declared its intention to explore opportunities of introducing new products from its parent company into the Nigerian market, Cadbury launched Tang, a fruit-flavoured powdered beverage in Q4 2012. However, Tang s impact on the market has been limited by competitor products such as PZ s Nutricima, Promasidor s Cowbell Chocolate, GlaxoSmithKline s Horlicks and Ovaltine by Associated British Foods. In the confectionery segment, Cadbury remains the dominant player with its TomTom and Buttermint brands. In 2012, it introduced HoneyLemon and Strawberry as additional TomTom variants to an already existing Classic flavor to consolidate its market leadership. Procter and Gamble s Vicks Lemon Plus, Vicks Blue and Vicks Apple Plus have provided significant competition over the years. Cadbury s cocoa processing plant located in Ondo State, South West Nigeria, provides all cocoa requirements for the manufacturing of Bournvita and processes cocoa beans into several high quality cocoa by-products such as cocoa butter, cocoa powder, cocoa cake and cocoa liquor for local and export markets. Nigeria s healthy population growth of around 2% per annum, the shifting but favourable demographics as well as the country s economic growth should support consumer sector growth over the next decade. 29 September 2015 10
Cadbury Nigeria s key products and competitor offerings CADBURY COMPETITION BEVERAGES Nestle Promassidor GSK Associated British Foods CONFECTIONERY Procter & Gamble Nestle Source: Cadbury Nigeria, FBN Capital Research Margins Prior to the slowdown in the last few years, unit volume growth in the consumer goods sector averaged 5-10% y/y. Combined with price increases of around 5-10% on average, consumer goods companies were able to grow their topline by at least 10% y/y. However, this is now seldom the case. Topline growth has been reduced due to pressures on consumer wallet as a result of factors such as the reduction of fuel subsidies in 2012, security challenges in the North and hikes in electricity tariffs among others. Companies have been forced to either cut prices or risk losing market share. Consequently, this has introduced some pressure on margins. Nestle s PBT margin which had been consistently around 20% fell to 17.1% in 2014. Unilever s PBT margins were stable between 2009 and 2012, averaging 14%, but declined to 12% in 2013 and more significantly to 5.2% in 2014. Cadbury s gross margins improved steadily from around 25% in 2009 to 37% in 2013, but in 2014 saw a contraction of just over 1,000bps. Cocoa and sugar are Cadbury s major raw material for its flagship brands, Bournvita and TomTom/Buttermint respectively. Although global cocoa and sugar prices have been volatile over the years, Cadbury has been able to manage its raw material costs well by leveraging its former subsidiary, SCPL, for the supply of all the cocoa required for the production of Bournvita. Nigeria is the 4th largest cocoa producer globally. Other top producers include Cote d Ivoire, Indonesia, Ghana and Brazil. Cadbury s operations were fully integrated with Stanmark in Q1 2013, leading to additional operating cost efficiencies, hence the boost to gross margins that year. 29 September 2015 11
PBT margins trends for consumer goods companies 25% 20% 15% 10% 5% Cadbury Nigeria margin trends 50.0% 40.0% 30.0% 20.0% 10.0% 0% -5% 2009 2010 2011 2012 2013 2014 0.0% -10.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014-10% -20.0% Nestle UAC Foods Unilever Cadbury PZ Cussons Gross margin EBIT margin Opex-to-sales Source: Company data, FBN Capital Research estimates Company data, FBN Capital Research estimates Cadbury Nigeria cost-to-sales ratio Cocoa and sugar price (US$/te) trends 78.0% 76.0% 74.0% 72.0% 70.0% 68.0% 66.0% 64.0% 62.0% 60.0% 58.0% 56.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cocoa Sugar Source: Company data, FBN Capital Research estimates Source: Index Mundi, FBN Capital Research The opex-to-sales ratio has shown a steady improvement over the last decade. Management focused on strengthening cost control and processes within the company in a bid to reverse the losses recorded between 2006 and 2009. EBIT and PBT margins improved subsequently, culminating in the company returning to profitability in 2010. An internal crisis had led to the NSE suspending Cadbury shares in 2006. Prior to 2010, EBIT margin was negative except in 2009 when it came in at 3.9%. It remained positive thereon albeit a significant drop in 2014. Similarly, PBT margin was negative prior to 2010 but became positive afterwards, although it dipped in 2014. Shifting focus to 2014 when all key P&L metrics for Cadbury worsened, sales declined -14.7% y/y, gross margin declined to 26.0% from an average of 34.7% between 2012 and 2013 while PBT declined by a staggering -80.2% y/y. These declines are also reflected in the sequential trends for 2014. Again, we believe Cadbury s limited portfolio offering put the company at a disadvantage relative to peers. The company is facing severe competition in the beverage segment as Nestle appears to be more aggressive in gaining market share with Milo. Cadbury is responding by working on increasing its coverage of stores and encouraging its 29 September 2015 12
distributors to make their stores more efficient through placement improvements. These endeavours which started in 2013 were eclipsed by the ripple effect of declining oil prices and the devaluation of the naira. Cadbury Nigeria Sales and PBT margin Cadbury Nigeria quarterly margin trends 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 30% 20% 10% 0% -10% -20% -30% -40% 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Q1 2014 Q2 2014 Q3 2014 Q4 2014 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% Sales (N'm) PBT margin Source: Company data, FBN Capital Research estimates Sales (N'm) Gross margin Opex margin PBT margin Source: Company data, FBN Capital Research estimates Balance sheet and cash flow trends Investigations by Nigeria s Securities and Exchange Commission (SEC) and an independent auditor in 2006 revealed irregularities of between N13-15bn from 2002. As a result, Cadbury Nigeria was suspended from the Nigerian Stock Exchange. A restatement of the accounts showed a highly leveraged balance sheet with a debt/equity ratio of around 8.0x in 2006 (compared with a figure of 1.0x that had been reported in 2005). Thereafter, a new management team was installed to turn the company around. In addition to cutting costs (opex-to-sales declined to 22.4% in 2014 from 45.6% in 2006), Cadbury raised N22.2bn in new equity via a rights issue in 2009. The proceeds were used to offset some of the company s borrowings and to fund capex. Breakdown of capital structure Operating free cash flow after capex (N m) 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014-5,000 Shareholders' funds Debt -10,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Company data, FBN Capital Research estimates Source: Company data, FBN Capital Research estimates 29 September 2015 13
In 2014, Cadbury announced plans to embark on a capital reduction exercise; it would subsequently return excess capital of N11.9bn to shareholders by cancelling 2 out of every 5 shares held by them. At present, Cadbury s capital structure is 100% equity. Capex increased by an average of N1.1bn between 2006 and 2009 to an average of N3.0bn over 2010 to 2014 period, a 168.3% rise. During this period, Cadbury embarked on a factory expansion project. It also transitioned to using liquefied petroleum gas as its main energy source, generating cost savings as well as installing a 3.6 megawatt gas powered generator, among others. Capex-to-sales ratio averaged 9.1% between 2010 and 2014 compared with 5.4% over 2006-2009 period. Recent earnings and outlook Cadbury Nigeria s Q1 2015 results showed that while sales were down slightly (- 2.7% y/y) at N6.7bn, the company recorded losses before and after tax of N304m compared with a N1.2bn profit (both PBT and PAT) in Q1 2014. This is the fifth consecutive quarter in which Cadbury s profitability has deteriorated. A gross margin contraction of -1619bps y/y to 25.1% more than offset any benefits from a flattish opex line, leading to the loss. Sequentially, sales and PBT declined by 6.6% q/q and 67.3% q/q respectively. The PBT decline was exacerbated by a 334% q/q rise in opex. Q2 2015 results showed y/y declines for all key lines on the P&L. While sales of N7.4bn fell -12% y/y, PBT and PAT declined by -92% y/y and -89% y/y respectively. The PBT decline reflects the combination of a 241bp y/y contraction in gross margin and a 19% y/y rise in opex. Sequentially, Cadbury s numbers show a slight improvement from what it delivered for Q1 2015. While sales were up 10% q/q, Cadbury recorded PBT and PAT of N53m each compared with a loss before tax of -N304m in the previous quarter. A gross margin expansion of 774bps q/q more than offset a 20% q/q rise in opex. Cadbury H1 2015 results Q1 2015 Q2 2015 H1 2015 Actual Y/y Q/q Actual Y/y Q/q Actual Y/y Sales 6,732-2.7% -6.6% 7,406-11.8% 10.0% 14,138-7.7% Cost of sales -5,041 24.1% -36.9% -4,973-8.6% -1.3% -10,013 1.1% Gross profit 1,691-40.8% n/a 2,433-17.9% 43.9% 4,124-23.8% -gross margin 25.1% -1619bps 3590bps 32.9% -241bps 774bps 29.2% -616bps Operating expenses -2,029 0.5% 334.0% -2,424 19.0% 19.5% -4,452 9.8% Other operating income 4-90.1% -98.8% 10-103.1% 172.3% 13-90.0% Operating profit -334 n/a -64.9% 19-96.8% -105.8% -315 n/a Net int. and similar chrgs 30-88.9% 35.4% 33 19.1% 9.9% 64-78.9% PBT before exceptionals -304 n/a -67.3% 53-91.8% n/a -251 n/a Exceptional items - 0bps 0bps 0 0bps n/a - n/a PBT -304 n/a -67.3% 53-91.8% n/a -251 n/a -PBT margin -4.5% -2116bps 839bps 0.7% -691bps 522bps -1.8% -1347bps Tax 0 n/a n/a 0 n/a n/a 0 n/a Tax rate 0.0% n/a -8491bps 0.0% -2874bps 0bps 0.0% -2952bps PAT -304 n/a 116.4% 53-88.5% n/a -251 n/a -PAT margins -4.5% -1617bps -256bps 0.7% -472bps 522bps -1.8% -1002bps Other comp. Income - n/a n/a 0 n/a n/a - n/a PAT after comp. income -304 n/a n/a 53-88.5% n/a -251 n/a Source: NSE, FBN Capital Research 29 September 2015 14
Combining the Q1 and Q2 results, Cadbury reported H1 2015 sales and loss before tax of N14.1bn (-7.7% y/y) and N251m respectively. The topline decline was unsurprising given the persistent headwinds faced by consumer names over recent quarters. The insecurity in the north of the country proved difficult to overcome. While active steps are being taken to restore security (mainly to the north east), we do not expect a quick turnaround in earnings for the industry. This situation is even more difficult for Cadbury, given its limited product portfolio. In addition, the devaluations of the naira weighed on Cadbury s performance. Besides cocoa, which Cadbury actively sources locally, other primary raw materials such as sugar and milk are mainly imported. Outlook Looking ahead, we do not anticipate a recovery in demand in 2015, given the difficult macro environment. Consumers are even more cautious with their spending and will opt to down-trade to value products in the near term. Management aims to increase market share in the beverage and confectionery segments and also introduce new products. These could count as a positive for Cadbury if implemented successfully. Price increases are unlikely due to the low switching costs in the sector. As such, like most other consumer names, we expect that Cadbury will be looking to efficiency in operations and increasing volumes to boost earnings. After a weak 2015, we anticipate slightly better results in the coming years as a result of positive base effects. We forecast gross margins to average 26.4% between 2015-2017E, largely due to Cadbury s local sourcing of cocoa, the primary raw material for Bournvita. Our average opex-to-sales ratio of 22.8% over 2015-2017E period compares with 22.4% in 2014. We see EBIT averaging 7.5% over the same period vs -80.1% in 2014. Our 2015-2017E adjusted EPS is expected to be flattish. Headline forecasts and assumptions 2014 2015E 2016E 2017E Sales (N' bn) 30,519 28,382 28,950 30,108 Y/y sales growth -14.7% -7.0% 2.0% 4.0% Gross margin 26.0% 26.3% 26.3% 26.7% Opex-to-sales ratio -22.4% -23.4% -22.5% -22.5% PBT (N bn) 1,467 1,192 1,469 1,634 PBT growth -80.2% -18.7% 23.2% 11.2% EPS growth -43.1% -46.1% 23.2% 9.9% Adj. EPS growth -58.2% -33.0% 23.2% 9.9% Source: Company data, FBN Capital Research estimates With respect to 2015E specifically, we have forecasted a -7.0% y/y in sales and a - 18.7% y/y decline in PBT. Although we expect some improvements in gross margin and opex-to-sales to 26.3% and 23.4% respectively, the impact of the expected decline in sales on our PBT forecast is significant. Consequently, we forecast adjusted EPS to decline by -33.0% y/y. We have modelled a capex spend of N1.4bn in 2015E (equivalent to a capex to sales ratio of 5.0%), similar to the prior year. 29 September 2015 15
Management Shareholders Roy Naaman Managing Director Oyeyimika Adeboye Finance Director Fola Akande Company Secretary/Chief Counsel Source: Cadbury Nigeria, FBN Capital Research % Held Mondelez International through Cadbury Schweppes Overseas 74.97 Individual and Institutional Shareholders 25.03 Source: Cadbury Nigeria, FBN Capital Research 29 September 2015 16
Cadbury Nigeria financials (Dec YE): N millions, except per share data Income Statement 2014A 2015E 2016E 2017E Cash flow 2014A 2015E 2016E 2017E Turnover 30,519 28,382 28,950 30,108 Income tax -716-203 -104-147 Cost of sales -22588-20918 -21336-22069 Pre-working capital changes 2,354 1,775 1,736 1,720 Gross profit 7,930 7,465 7,614 8,039 Working capital changes 779-341 91 185 Total opex -6,832-6,641-6,514-6,774 Cash flow from operations 1,420 3,710 3,103 3,315 Other operating income 38 38 38 38 Interest received 331 331 331 331 Operating profit (EBIT) 1,136 861 1,138 1,303 Proceeds from sale of fixed assets 36 0 0 0 Net interest payable 331 331 331 331 Purchase of fixed assets -1,439-1,419-1,592-1,656 PBT before exceptional items 1,467 1,192 1,469 1,634 Cash flow from investing -1,129-1,088-1,261-1,325 Exceptional items 0 0 0 0 Incr. /(decr) in bank overdraft and ST borrowings -2,457-2,442-912 -1,124 PBT 1,467 1,192 1,469 1,634 Interest paid 0 0 0 0 Taxation 45-179 -220-261 Dividend paid -2,457-2,442-912 -1,124 PAT 1,513 1,013 1,249 1,372 Proceeds from rights issue/(share restructuring) -11,898 0 0 0 Minority interest 0 0 0 0 Share issue expenses 0 0 0 0 EPS (reported) (N) 1.00 0.54 0.66 0.73 Share based payment 0 0 0 0 EPS (adjusted) (N) 0.81 0.54 0.66 0.73 Loan received 0 0 0 0 DPS (N) 1.30 0.49 0.60 0.66 Bank overdraft 0 0 0 0 Payout ratio 130% 90% 90% 90% Cash flow from financing -14,354-2,442-912 -1,124 Dividend sum 2442 912 1124 1235 Net increase/(decrease) in cash & cash equiv. -14,064 181 929 866 WASC 1,878 1,878 1,878 1,878 Cash & equiv. at the beg. of the yr 17,749 3,685 3,866 4,795 Cash & equiv. at the end of the yr 3,685 3,866 4,795 5,661 Balance Sheet 2014A 2015E 2016E 2017E Fixed assets 16,484 16,128 15,985 15,921 Profitability ratios 2014A 2015E 2016E 2017E Stocks 2,393 2,225 2,270 2,361 Gross profit margin 26% 26% 26% 27% Debtors 2,393 2,225 2,270 2,361 EBITDA margin 10% 9% 10% 10% Prepayments 0 0 0 0 Operating profit margin 4% 3% 4% 4% Assets held for sale 0 0 0 0 PBT margin 5% 4% 5% 5% Deposits for imports 0 0 0 0 Net profit margin 6% 4% 4% 5% Cash and bank balances 3,685 3,866 4,795 5,661 ROA av. 3% 3% 5% 5% Total current assets 12,336 11,911 13,002 14,196 ROCE av. 10% 8% 11% 13% Total assets 28,820 28,040 28,987 30,117 ROE av. (underlying) 8% 11% 14% 15% Bank overdrafts and short term borrowings 0 0 0 0 Dividend yield 5% 2% 2% 3% Creditors and accruals 13,518 12,572 12,823 13,336 Opex/sales -22% -23% -23% -23% Tax payable 524 500 616 731 Dividend payable 0 0 0 0 Activity ratios 2014A 2015E 2016E 2017E Due to related companies 0 0 0 0 Inventory turnover 10.6x 9.1x 9.5x 9.5x Total current liabilities 14,042 13,072 13,440 14,067 Days of inventory on hand 35 40 38 38 Deferred taxation 0 0 0 0 Receivable turnover 4.9x 4.8x 5.1x 5.1x Provision for gratuity and other long term e 3,236 4,854 5,096 5,351 Days of sales outstanding 75 76 72 71 Finance lease 0 0 0 0 Payable turnover 1.7x 1.6x 1.7x 1.7x Non-current liabilities 3,236 4,854 5,096 5,351 No. of payable days 214 229 217 215 Share capital 939 939 939 939 Cash conversion cycle -105-114 -106-106 Share premium 272 272 272 272 Working capital turnover -5.4x -5.4x -5.6x -5.6x Fixed asset revaluation reserve 0 0 0 0 Fixed asset turnover 1.8x 1.8x 1.8x 1.9x General reserve 10,331 8,902 9,239 9,487 Capital employed turnover 2.8x 2.6x 2.8x 3.0x Shareholders' funds 11,542 10,114 10,451 10,699 Total asset turnover 0.8x 1.0x 1.0x 1.0x Minority interest 0 0 0 0 BVPS 6.15 5.38 5.56 5.70 Liquidity ratios 2014A 2015E 2016E 2017E Current ratio 0.9x 0.9x 1.0x 1.0x Per share data 2014A 2015E 2016E 2017E Quick ratio 0.7x 0.7x 0.8x 0.8x Ave. shares ranking (m) 1878 1878 1878 1878 Cash ratio 0.3x 0.3x 0.4x 0.4x EPS (reported) (N) 1.00 0.54 0.66 0.73 EPS (adjusted) (N) 0.81 0.54 0.66 0.73 Solvency ratios 2014A 2015E 2016E 2017E Net dividend (N) 1.30 0.49 0.60 0.66 Debt-to-capital ratio 0% 0% 0% 0% Payout ratio (%) 130% 90% 90% 90% Debt-to-equity ratio 0% 0% 0% 0% NAVPS (N) 6.15 5.38 5.56 5.70 Financial leverage 2.5x 2.8x 2.8x 2.8x Valuation 2014A 2015E 2016E 2017E Y/y growth 2014A 2015E 2016E 2017E EV / Sales 1.5x 1.6x 1.6x 1.5x Turnover -14.7% -7.0% 2.0% 4.0% EV / EBITDA 14.9x 17.5x 15.8x 14.8x Gross profit -39.5% -5.9% 2.0% 5.6% EV / EBIT 39.3x 53.5x 39.9x 34.4x Total opex -8.1% -2.8% -1.9% 4.0% EV / CE 4.2x 4.3x 4.4x 4.5x Operating profit (EBIT) -80.1% -24.2% 32.2% 14.4% Price to earnings (underlying) 29.8x 44.5x 36.1x 32.8x PBT -80.2% -18.7% 23.2% 11.2% Price to free cash flow 38.4x 52.3x 39.6x 34.6x PAT ex MI -65.8% -46.1% 23.2% 9.9% Free cash flow yield 2.6% 1.9% 2.5% 2.9% EPS (adjusted) (N) -58.2% -33.0% 23.2% 9.9% Price to book value 3.9x 4.5x 4.3x 4.2x DPS (N) 0.0% 0.0% 0.0% 0.0% Source: Company data, FBN Capital Research estimates 29 September 2015 17
[Notes] 29 September 2015 18
Research analyst certification The research analyst(s) primarily responsible for the preparation and content of all or any identified portion of this research report hereby certifies that all of the views expressed herein accurately reflect their personal views about those issuer(s) or subject securities. Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report. Important disclosures Analysts' compensation is based upon activities and services intended to benefit the investor clients of FBN Capital Limited ( FBN Capital ) and the affiliates of First Bank of Nigeria Group ( the Group ). Analysts receive compensation that is impacted by overall profitability of FBN Capital which includes revenues from, among other business units Institutional Sales and Trading and Capital Markets/Investment Banking. Recommendations and movements in price target Date Price (N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 29-Sep-15 24.0 n/a 25.2 n/a Neutral FBN Capital Research s recommendation distribution Outperform Neutral Underperform Total Stocks covered 6 16 6 28 % of total stocks covered 21.4% 57.1% 21.4% 100.0% Investment banking clients 0 2 1 3 % of investment banking clients 0.0% 66.7% 33.3% 100.0% FBN Capital Equity Research recommendation definitions Outperform The analyst expects the stock to outperform the Nigerian Stock Exchange (NSE) All Share Index over the next 12 months or the specified investment horizon. Neutral The analyst expects the stock to perform in line with the NSE All Share Index over the next 12 months or the specified investment horizon. Underperform The analyst expects the stock to underperform the NSE All Share Index over the next 12 months or the specified investment horizon. Not Rated The rating and price target are currently suspended to comply with regulations or firm policies such as when FBN Capital is acting as an adviser in a merger or transaction which involves the company whose rating has been suspended or due to reasons that limit the ability of the analysts to provide forecasts for the company in question. Benchmark The Nigerian Stock Exchange All Share Index 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 the 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. Companies from which FBN Capital has received compensation in the last 12 months Outperform Neutral Underperform Total 0 2 1 3 % distribution 0.0% 66.7% 33.3% 100% 29 September 2015 19
Important US Regulatory Disclosures on Subject Companies This material was produced by FBN Capital Limited solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC and elsewhere in the world by FBN Capital Limited or an authorized affiliate of FBN Capital Limited. This document does not constitute an offer of, or an invitation by or on behalf of FBN Capital Limited or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which FBN Capital Limited or its affiliates consider to be reliable. Neither FBN Capital Limited nor its affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging markets securities may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC. Subject Company Price (N) Rating Applicable disclosures Associated British Foods GBP3,251.0 n/a n/a Dangote Sugar Refinery 6.9 Neutral n/a Flour Mills of Nigeria 22.0 Neutral III, IV, VII GlaxoSmithKline GBP1,250.5 n/a n/a Guinness Nigeria 154.0 Neutral VII International Breweries 17.9 Neutral n/a Nestle Nigeria 820.0 Underperform n/a Nigerian Breweries 140.1 Neutral VII Procter & Gamble USD72.7 n/a n/a Promasidor n/a n/a n/a PZ Cussons Nigeria 26.2 Underperform n/a UAC Foods n/a n/a n/a UAC of Nigeria 30.0 Outperform n/a Unilever Nigeria 46.0 Underperform V, VII I. The analyst(s) responsible for the preparation and content of this report (as shown on the front page of this report) holds personal positions in a class of common equity securities of the company to which this report relates. II. III. FBN Capital Limited or its Affiliates have recently been the beneficial owners of 1% or more of the securities mentioned in this report. FBN Capital Limited or its affiliates have managed or co-managed a public offering of the securities mentioned in the report in the past 12 months. IV. FBN Capital Limited or its affiliates have received compensation for investment banking services from the issuer of these securities in the past 12 months. V. FBN Capital Limited expects to receive compensation for investment banking services from the issuer of these securities within the next three months. VI. FBN Capital or FBN Holdings is a market maker in the subject securities. VII. The company is a client of FBN Capital. 29 September 2015 20
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