Key Highlights
- Cadbury Nigeria Plc has been facing significant challenges that have impacted its financial performance, including rising operating expenses, competition from cheaper substitutes, and declining margins.
- The company’s financial statements for 2022 show that while there was an increase in pre-tax profit, this was largely due to income earned from bank deposits. The company has been facing rising costs of sales since 2020, which has had a significant impact on its margins.
- Cadbury Nigeria Plc has also struggled to offer good returns to its shareholders in recent years, with a low return on equity and a share price that has lost value since the beginning of the year. The company is highly leveraged and has relied on intercompany and external borrowings to remain afloat.
Cadbury Nigeria Plc, a multinational food and beverage company operating in Nigeria, has been facing several challenges that have impacted its financial performance. Rising operating expenses, driven by higher inflation, exchange rate depreciation, logistics costs, and personnel costs, have significantly affected the company’s profitability.
Additionally, the company operates in a highly competitive market, where cheaper substitutes are constantly undercutting prices.
The company’s financial statements for the year ended December 31, 2022, revealed a pre-tax profit of N1.3 billion, compared to N1 billion reported a year earlier. However, this increase in pre-tax profit was largely due to income earned from bank deposits. Interest income alone generated N1.1 billion in 2022.
A deeper analysis of the financial statements shows that the company has been facing rising costs of sales since 2020, which has had a significant impact on its margins.
The operating profit margin has declined from 4% in 2018 to 0.4% in 2022, indicating that the company has not been able to cope with the impact of the rising cost of sales.
Furthermore, the company’s statement of cash flows shows a negative net cash flow from operating activities of -N2.535 billion in 2022, largely due to the payment of inventories and outstanding value-added tax payments.
Cadbury Nigeria Plc has also struggled with offering good returns to its shareholders in recent years. The return on equity at 4.38% is considered low and trails the industry average return of 30%, despite the high leverage.
The company’s share price at N11.30 has lost 5.04% of its value since the beginning of the year, ranking it 137th on the NGX in terms of year-to-date performance. Shareholders’ worries are compounded by the fact that the company has lost 6% of the stock’s value from March 1st to date.
At a price-to-earnings multiple of 22x, which is higher than its peer average, the stock is considered expensive.
To remain afloat, the company has to rely on intercompany and external borrowings. During the year added import finance facilities linked loans of N14.219 billion.
The company has another N10 billion in intercompany loans which it also services. This takes the company’s debt-to-equity ratio to 179.37% as of December 2022, from 77% in 2021.
By some stroke of genius or luck, the company is still able to generate significant interest income to offset its financial cost. Its interest payment comes at a cost ranging from 10%-14% per annum.
Except there is an improvement in fortune, Cadbury’s ability to remain profitable will ostensibly come from its treasury management business.
That is not its core bread and butter but that is why it can still pay dividends. The company needs a major restructuring if it wants to compete with the likes of Nestle which boast almost 10x Cadbury’s revenue.
The company share prices are up 28% in the last year but down 43% from its year high of N17 per share. It staged a massive rally when we last suggested that the company delist and go private but since then the share price has failed to face north.
There is little impetus for another rally, rather what we see are headwinds. Cadbury does not only need to improve its margins it needs to do so to be able to service its debt. To repay the debts it will need to raise equity which could be costly.
No matter how you turn, Cadbury faces a raging headwind.
