Leveraging on an impressive Q1 2019 performance, Cadbury Nigeria Plc (Cadbury) announced a 7.2% y/y growth in Revenue to N28.9 billion for 9M 2019 compared to N27.0 billion in 9M 2018. The reported Revenue on an annualised basis is in line with our 2019e forecast of N38.9 billion.

Sturdy growth in the Refreshment Beverage and Confectionery business segment aided the growth in Revenue. Profit after tax grew to N0.6 billion in 9M 2019 from N0.2 billion in 9M 2018. However, the company recorded a loss of N21.7 million in Q3 on the back of production cost pressures.

We retain our Revenue forecast of N38.9 billion for 2019e but we cut our long-term Revenue growth forecast on the backdrop of weaker than expected recovery in consumption spending and poor quarterly Revenue growth for Cadbury. We revise our cost margin higher to 77.0% due to renewed pressure on cocoa and sugar prices. While we expect operating performance to remain weak in the medium term, improved leverage should provide support for profit growth.

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We downgrade the stock to a HOLD from our previous BUY rating. We cut our target price to N11.88/s from N13.70/s which implies an upside of 23.7% to Monday’s closing price of N9.60/s. Despite reasonable upside, the company’s weak operating performance evidenced in declining EBITDA and Operating Profit due to pressure from costs informs our downgrade. We arrived at our target price using a combination of the DCF and relative valuations in a ratio of 60:40.

Leveraging on a strong Q1 Revenue growth, Cadbury reported a 7.2% y/y growth in Revenue to N28.9bn in 9M 2019 from N27.0bn recorded in 9M 2018, driven by broad-based recovery in Refreshment Beverages (+11.6% y/y) and Confectioneries (+16.1% y/y) while Intermediate Cocoa Products (-23.5% y/y) continues to lag. As is always the case in the July to September financial period, Revenue growth within the quarter showed some weakness. On a q/q basis, Revenue fell 7.0% to N9.5bn in Q3 2019. Annualised Revenue remained broadly in line with our FY 2019 forecast (Annualised actual – N38.6 billion vs CSL Forecast – N38.9 billion).

However, during the quarter, we observed significant weakness in Refreshment Beverage (down 24.1% q/q) which was driven by decline in volumes. On the other hand, Confectionary recovered sharply in Q3 climbing 34.7% q/q with Intermediate Cocoa Products sustaining its recovery posting a 5.5% q/q growth. We note that Cadbury’s aggressive promotion of its TomTom and Clorets brand has fed into impressive recovery for the Confectionary Business.

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Cost of Sales (ex-depreciation) grew slower than Revenue, up 6.6% y/y to N22.3 billion in 9M 2019 from N20.9 billion in 9M 2018. The slower growth in Cost of Sales was on the back of lower Cocoa and Sugar prices on a y/y basis in Q1 and Q2 which fed into stronger margins for the Refreshment beverage segment of its business. Our benchmark monitor for Cocoa prices is down 0.7% YTD while Sugar is up 2.2%. We observed a steeply higher prices for these core raw materials in Q3. Consequently, Gross Profit increased 9.4% y/y to N6.6 billion in 9M 2019 from N6.1 billion in 9M 2018. Gross margin also improved 0.4ppts y/y to 22.9% in 9M 2019 from 22.5% in 9M 2018. We note improved Gross margin in Q3 but remains shy of 5-Year historical average of 28.9%.

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CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

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