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Why Cadbury might be a long “Hold”

Top on the list of the company’s challenges is that it is over-due for a rebrand.

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The consumer goods sector is almost always a win amongst others on the Nigerian Stock Exchange, mainly because of its stability with very little seasonal restrictions. In other words, consumer goods are important during Valentine’s as much as they are important at Christmas. Yet, the COVID-19 pandemic era has been an entirely different ball game for one of Nigeria’s leading consumer brands — Cadbury Nigeria Plc.

Having lost a lot of its grounds to competitors like Nestle years ago, the company had set off on a path to recovery trying to expand its market share and increase its revenue. Revenue had grown at a steady pace all through the years, moving from N27.8 billion in 2015 to N39.3 billion in 2019. The company’s 2019 financials had also continued the seemingly smooth sail to growth with a 26% increase in profit, following a fair 9% increase in revenue at N39.3 billion in the year.

READ ALSO: GTBank declares closed period as directors meet July 22nd to consider H1 result

Not hesitating to show its appreciation to its shareholders who had not received dividends for three years, before 2019, the company declared a dividend per share of 49 kobo this year, which was almost double the 25 kobo it had paid last year. It was also the first time the company had been paying two-consecutive dividends after a 3-year break. Needless to say, the dividends are still far from exciting.

However, 2020 has come with challenges that have had the company already dropping in revenue for 2 out of 2 quarters. Its Q1 2019 financials reveal that the company earned a total revenue of N8.5 billion, representing an 8% decline from the N9.2 billion it recorded in Q1 2019. It was able to still attain a profit after tax of 26% from N506.7 million to N638.9 million, owing to improved other income and a slight reduction in expenses. However, in its recently released Q2 results, its revenue took an even lower plunge of 27.6% to 7.4 million. In the same trajectory, the company recorded a loss for the quarter of N102 million, representing a whopping 162.7% drop in profits from the corresponding quarter in 2019 all from the reduced revenue. Expenses did not reduce as much.

READ MORE: Nestle, Cadbury, Flour Mills on a home run, investors gain N21.8 billion

The steady progression

Top on the list of the company’s challenges is that it is over-due for a rebrand. The company’s top brands, Bournvita, TomTom, Trebor/Peppermint, Eclairs and more have one thing in common and it is that they are almost nostalgic. We know and love them, but they’re not necessarily with us on a daily basis. Another way to look at it is that they have attained the same scarcity as luxury items, only at a low price point. Consequently, it is only natural that headwinds of the COVID-19 pandemic and all the other challenges 2020 has not been bereft of, got it on a downward spiral as they became less exciting given the limited financial resources of most Nigerians.

Another challenge that rests on its shoulders is the less than proportionate reduction in expenses despite the reduced revenue – and it didn’t start this quarter. Since the year 2015, analysis reveals that the company’s revenue has risen by 9% on an annualized basis. For some reason, cost of sales and operating expenses have also risen by 9% over the same period. What is more alarming is that these cost of sale makes up a huge amount of the total expenses. This could mean input prices have been rising without a similar increase in prices. It might also not have the required brand equity to survive a significant increase in price given the availability of close substitutes and alternatives that could even transcend the consumer goods industry.

READ ALSO: Coca Cola revenue dips but analyst recommend stock as a buy

For a company which was quoted on the Nigerian Stock Exchange (NSE) as far back as 1976, its current share price of N6.60 which is low on its 52-week average of N4.95 and 11.65 is underwhelming. An earnings per share of 0.51, show that its performance has not been stellar. With the overall economy further expected to plunge before only marginally recovering over the next few years, we cannot expect much of a difference in the state of its revenue. Its high price to earnings ratio of 13.07 could also mean many investors either have faith in the future of the company or are simply hanging on to its past victories.

Either way, what is clear is that investors in the company are going to need to be in a long hold position with very little gains in dividends. Whether the duration of the waiting period is longer or shorter rests on the back of its management to work out strategies to remain in the line of sight of the average consumer at low costs. Its growth is particularly important as it just does not have the option of being a value stock.

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CBN “Naira 4 Dollar Scheme” Explained

What the CBN’s Naira 4 Dollar scheme means for your money.

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CBN

In what appears to be an attempt to incentivize dollar remittances by all means possible, the Central Bank of Nigeria (CBN) released a circular to Deposit Money Banks (DMBs), International Money Transfer Operators (IMTO), and the General Public, advising that remittances paid into a bank account will attract an additional credit alert for every USD$1 received!

Yes, you read that correctly. The CBN will facilitate a special additional credit alert of N5 for every USD$1 received. In other words,

  • if someone sends you $10,000, you get an additional special credit alert for N50,000.
  • If someone sends you $100,000, you get an additional special credit alert for N500,000.

Who is eligible?

To be eligible, the diaspora remittances need to be processed and received from one of the registered IMTOs and funds received into a Bank account operated by the DMBs. (So, if you are receiving funds via Crypto sorry you are not eligible).

Additionally, the circular says this “incentive runs from Monday 8th March 2021 to Saturday 8th May 2021″. So, if you have plans to receive dollars, you can plan accordingly.

The circular is not clear how exactly the commercial banks will know which account to pay the extra special credits into. Although, that may be a question diaspora funds recipients will need to ask their DMB accounts officers to clarify for them.

How will this be funded?

The circular notes that the “CBN shall through commercial banks, pay to recipients the N5 incentive for every USD$1”. In other words, it is the CBN funding the cost of this special extra credit.

  • One would argue that given the costs of alternative incentives to attract dollars such as the special OMO window for FPI, this may be a cheaper alternative for the CBN.
  • But we will need to see the volume of expected remittance to be certain of that. Nigeria attracts about $5billion per quarter in remittances and only trails oil in terms of foreign earnings.

Why this matter to Nigerians?

Following the collapse of US Dollar inflows into the country, the CBN initially tried to balance its current account deficits and avoid an official devaluation by tackling FOREX demand (Think ban of 41 items, etc).

Finally, this short-term Naira-4-Dollar scheme will not be called an official Naira Devaluation. But a question is what do we call the new short-term price of N412.50 + N5.00? Maybe we can call it Naira Modulation.

 

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Blurb

Nigerian Breweries leveraging, but stacking cash through rising input costs

The marathon continues for Nigerian Breweries with its 2020 financials.

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Humanity might need more booze to survive the increasingly daunting intricacies of life, but Nigerian Breweries 2020 financial statement is proof that even the best can get caught up in the reality of changing business lifecycles.

Nigerian Breweries Plc had floored the market providing both alcoholic and non-alcoholic premium quality beverages across the nation. But with brands like Star lager beer launched as far back as 1949, Gulder lager beer launched in 1970, and even the family-friendly Maltina introduced as far back as 1976, it is only natural that both the old and new generation competition gives them a run for their market share.

Much like other old money companies, Nigerian Breweries has done its bit to remain relevant in the industry from creating new variants of existing favoured brands to paying dividends consistently annually for the past few years. Yet within the same period, the company’s financial statements have been a testament to its streamlined market share and reducing profits. The marathon continues with its 2020 financials. The industry giant may as well be setting itself up for a debt quagmire peradventure its projections do not match the true reality of events.

READ: How COVID-19 has changed Nigeria’s consumer goods & industrial markets –KPMG

2020 financials: A tale of higher costs & larger debts

2020’s unfavourable financial/ business environment led to the increase in the prices of raw materials and disruptions in logistics for many Nigerian-domiciled businesses including Nigerian Breweries. Raw materials and consumables witnessed a 17% increase despite the marginal growth in revenue.

While the group’s 2020 results revealed a 4.35% increase in revenue from N323 billion in the prior year to around N337 billion, these gains were curtailed by a higher-than-par increase in cost of sales which had risen by 13.9%, from the N191.8 billion expended in 2019 to N218.4 billion as its 2020 financials reveal and interest rates going way up.

READ: Flour Mills and its diverse challenges

The company’s lower operating expenses were not enough to salvage the disruption caused by the raging interest expense following increased charges paid on bank loans and overdraft facilities as well as the significant increase in overall debt. Between 2019 and 2020 alone, long term loans and borrowings increased by 974% from N4.8 billion to as much as N51.8 billion. Even trade and other long term payables increased by 35%.

In its financials, the company noted that it has revolving credit facilities with five Nigerian banks to finance its working capital. The approved limit of the loan with each of the banks range from ₦6 billion to ₦15 billion (total of ₦66 billion) and each of the agreements had been signed in 2016 with a tenor of five years. The Company had also obtained Capital and Working capital finance from the BoI in 2019.

READ: Manufacturing sector in Nigeria and the reality of a “new normal”

It is no news that the company is involved in diversified lease arrangements. Following reclassifications made in 2019 to some of its lease assets, the 2020 asset base also witnessed significant increase in Right of Use Assets which increased by 288%% from N11.1 billion to N42.9 billion. Yet, the fact that in one year, interest expense on Lease Liabilities rose from N19.7 million in 2019 and to a whopping N4.171 billion shows that the company is taking way more debt than its books require.

But what’s it using all the cash for?

Beyond rising material costs, borrowing costs have been huge and the annual interest payment by virtue of these loans make the possibility of higher profits for the company a mirage. That said, the overall increase in total liabilities might not have been such a bad idea if the funds were being used to increase revenue and profits. But having a huge chunk of all that money in cash creates a different kind of challenge. Cash and bank values in its statement of financial position significantly increased by 377% from N6.4 billion in 2019 to N30.4 billion in 2020.

Is the cash being held to mitigate possible challenges of the volatile economy or are they being used to pay dividends? Even at a share price of N52 per share, the company’s price-to-book value sits at 2.5816, testament of its dire overvaluation. Consequently, there is an ardent need for the company to come up with newer ways to attract the wider market and keep its book in the green with a little less external funding.

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