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: 2014. 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 NGN22.00. 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 2013. 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: 2019. Q3: 2015 EARNINGS UPDATE 2.4 1.6 0.8 Relative Metrics Current price 21.38 P/E ttm 72.35x P/B 3.43x Div. Yield 1.38% 52-Wk av. Vol (mn) 0.387 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) 41.320 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 -58.10% 52-Week Hi 52.51 52-Week Lo 21.90 Year Hi 42.00 Year Lo 21.90 Beta 0.30 14D-RSI 20.27 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
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 21.073 23.313 26.765 Cost of Sales 14.671 14.606 18.468 Gross Profit 6.402 8.707 8.297 OPEX 6.382 6.365 7.762 Finance Income 0.114 0.309 0.2155 PBT 0.041 2.397 0.816 PAT 0.029 1.653 0.555 Balance Sheet Inventories 2.303 2.393 2.428 Debtors/Receivables 4.961 6.093 5.125 Cash and bank 4.537 3.685 4.840 Other Assets 15.902 16.649 16.649 Total Assets 27.703 28.820 28.473 Trade and other Payables 13.764 13.518 12.812 Employee Benefits 3.418 3.236 2.847 Total Liabilities 17.353 17.278 14.556 Shareholders' fund 10.350 11.542 11.709 Per share data CADBURY Current Price 22.00 Trailing EPS -0.06 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
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Movements in Price Target Company Name: Cadbury Nigeria Plc Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 21/10/2015 22.00 37.21 21.38 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
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