Cadbury Nigeria Plc share price has had a stellar year with the stock returning 144% in the last one year alone. In fact, had you invested N1million in this stock back in November 2011 the value will be N2.44million today!! The question on a lot of people’s mind particularly Value investors like me is whether the share price is about right and if it makes sense to buy now? Doubts may creep in once in a while about their current valuation and you may wonder if it is too late to buy or if there is still an upside lying in there or if the current price is just absolutely Overvalued!!! In this post, we will attempt to see if the price is overvalued or not [upme_private]
About Cadbury Nigeria’s Operations
- Cadbury Nigeria Plc is a major player in the consumer goods business.
- Its major products are Bournvita, Tom Tom, Choco Drink, Buttermint, Halls Ahomka Ginger, Tang
- The Company’s is controlled by Mondelez International – Took over from Kraft Foods (75% Ownership though Cadbury Schweppes Overseas Ltd)
- The company has two business segments are Confectionery and Food Drinks Intermediate Cocoa Products.Its confectionary division which sells Bournvita and Buttermint makes up about 93% of Revenue (2011: 91%). The Cocoa division as at 2012 was loss making.
- The Company has exclusive rights to know-how, manufacture, distribution and marketing of Cadbury’s international brands in Nigeria. In consideration of this, technical service fees, royalties and other support. charges are paid to Cadbury UK, Cadbury UK Plc and Trebor Bassett Limited. Cadbury Nigeria spent N2.8billion in 2012 (N2.9billion :2011) on Trade Mark Licensing fee
Valuation Assumptions
- Revenue has risen 7% CAGR in the last 5 years on the back of strong sales from their flagship products, Bournvita and Tom Tom. Both products were rebranded and it appears the efforts is gradually yielding results.
- Despite this the products face intense competition as the market is littered with competing and often better products. They face competition from big players like Nestle but also face same from a heterogeneous group of local importers.
- Based on this I do not see revenue peaking at about 9-10% CAGR in the next two years before averaging at about 6% annually
- The company has so far done a good job at reducing cost over the years and I expect operating profit margin of about 12%
- Return on Equity is currently 19% and may rise to between 21-23% this year. However, I expect this figure to average at about 19% as pressure begins to tell on revenues and cost inch higher.
- The company is currently debt free having paid its short-term loan of N1.5billion
- I also project profits this year at between N4.5billion to N5billion
- It paid dividends totalling N1.5billion in 2012 (2011: Nil). I project they might declare between N2billion to N2.5billion in dividends this year
- The company also has Retained Earnings of N5.6billion which is adequately covered with its huge cash pile.
Other Assumptions
- Valuation is done based on DCF of future adjusted earnings per share. This is added to the terminal value and the current Book Value per share.
- Buyer of the share is only a minor shareholder with no influence that can be liken to any form of control
- Expected yield is based on the most recent ROAE of the company
- Inflation rate is projected at 9% average for the next 5 years
- Shares bought will be held for a minimum of 5years
- A margin of error of 8% is apportioned to make up for its uneven PAT
Summary
Cadbury Nigeria Pls has very good fundamentals considering their past and history with falsifying accounts (2006). However, the strong fundamentals and future outlook does not justify the current valuation placed on the stock in our opinion. Surely, the fact that they are debt free does add some impetus to the argument for the current price but everything else points to an over valued stock. Market price per share is 5x more than revenue per share, price earnings ratio is 1.2x higher than earnings growth and price to book ratio is also 9.2x. I agree these are all based on trailing earnings. If we use a forward P.E ratio based on the estimate that the company may post a revenue of N4.5 − 5billion the P.E ratio will still be 37x-39x based on the current price.
Opinion: Overvalued
You can download the Cadbury Valuation Spreadsheet I used to adjust and make your own valuations should you disagree with some of my assumptions.
NB: This is not an advice to buy or sell as no one has the monopoly of prediction when it comes to determining the future value of stocks. Follow your instincts.[/upme_private]
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Cadbury is overpriced at N62.85. Regardless, it will still rally towards N100, most especially after the impending shares reconstruction. Afterall, is Nestle not overvalued even at N500? Sometimes, stocks prices defy logic. The market is smarter than all of us.
Yeah, I thought so too as my valuation depicts. The market is not smart. It’s just naïve and never learns its lessons. You just have took for value amidst the naivety
Hmm, Ugo. You know human beings are very curious. It’s not just about the markets. It cuts across every human endeavour. The investors may be naive. But they’ve created a system that is smarter than them.
The markets are made of humans isnt it? So at the end of the day it basically reveals to us our inability to reason objectively at all times.
Well said, sir. The irrational behaviour of investors makes the market what it is; and creates the opportunities in the market.
Cadbury is overpriced at N62.85. Regardless, it will still rally towards N100, most especially after the impending shares reconstruction. Afterall, is Nestle not overvalued even at N500? Sometimes, stocks prices defy logic. The market is smarter than all of us.