The Nigerian financial landscape has been tumultuous since 2023, marked by policy shifts that have had varied impacts across different sectors.
The consumer goods sector has been among the hardest hit, with many companies struggling to remain profitable and experiencing the erosion of their shareholders’ funds.
Cadbury Nigeria Plc, a prominent player in the consumer goods sector, was also affected by the challenging financial landscape, becoming unprofitable in 2023 and continuing to struggle into 2024.
However, its recently released 2024 first half-year results indicate some signs of improvement.
The key question remains: Can the company sustain this momentum and return to profitability by the end of the second half of the year?
For shareholders and investors, the crucial consideration is the potential action to take regarding Cadbury’s stock. Should they buy, hold, or sell?
Historically, Cadbury Nigeria Plc has maintained consistent profitability from 2018 to 2022.
However, the turbulent financial year of 2023 marked a significant downturn, with the company recording a loss before tax of N28 billion.
This marked a stark contrast to its previous years of stable financial health, making the recent signs of improvement in the first half of 2024 particularly noteworthy.
In the second quarter of 2024, Cadbury reported a loss before tax of N3.43 billion, a substantial improvement compared to the loss of N19.47 billion reported in the second quarter of 2023.
This improvement moderated the first half-year loss before tax to N13.9 billion, representing a 4.5% decline from the N14.54 billion reported in the same period of 2023.
A review of the company’s financial statements reveals that the recent loss trend is largely driven by foreign exchange losses. In 2023, Cadbury recorded a foreign exchange loss of N36.93 billion, which significantly impacted its financial performance, resulting in a pre-tax loss despite an operating profit of N7.8 billion.
However, there are signs of improvement in 2024. In the second quarter, the foreign exchange loss was reduced to N4.22 billion, representing a 63% decline from the first quarter. This moderated the first half-year of 2024 foreign exchange loss to N15.79 billion.
According to the notes in the financial statements, realized foreign exchange losses accounted for approximately 95% of the total foreign exchange losses during these periods.
With a significant portion of these losses already realized, the company may be less exposed to future unexpected losses from currency fluctuations.
If the company implements or refines hedging strategies to protect against future foreign exchange risks, it is likely that these losses can be contained, thereby positively impacting profitability.
The company’s revenue growth is promising. In the first half of 2024, revenue increased by 44.46% year-on-year to N51.44 billion, which represents more than half of the total revenue reported for the entire year of 2023.
Also, the first half of 2024 growth rate exceeds the company’s longer-term 5-year compound annual growth rate (CAGR) of 19.57%, indicating an impressive acceleration in revenue performance.
Following the release of its second quarter 2024 results, Cadbury’s share price has increased by 8.7%, recovering from a 12.63% decline in the first half of the year to achieve a year-to-date gain of 5.79%. In 2023, the company experienced a substantial gain of 59.66%.
Although Cadbury is currently not profitable, its revenue growth and recent share price rally have positively impacted its market valuation relative to sales.
This is evidenced by the higher enterprise value to sales ratio of 1.06 in the first half of 2024 compared to 0.73 in 2023, despite the relatively higher enterprise value of N58.446 billion in 2023 compared to N54.432 billion in June 2024.
The enterprise value-to-EBITDA ratio also supports this positive view, with a higher multiple of 11.52 in June 2024 compared to 7.42 in 2023.
This suggests that investors are optimistic about Cadbury’s prospects, probably due to its recent revenue growth, reduced debt, and declining foreign exchange losses.
Another positive aspect is the improved balance sheet health, bolstered by Cadbury Schweppes Overseas Limited (CSOL), the parent company’s debt forgiveness of $20 million on the $40 million received on January 15, 2024, to support the repayment of overdue foreign exchange loans owed to local banks.
The debt forgiveness improved Cadbury’s balance sheet, restoring shareholders’ funds to a positive position of N2.534 billion from negative N6.514 billion as of December 2023.
That said, Cadbury needs to improve its cost management. The rising cost of sales, which is growing faster than revenue, is a significant concern.
In 2024, the quarterly costs of sales increased on average at 89.54%, compared to an average revenue growth of 44.37% in Q1 and Q2. This has contributed to a decline in both gross profit and gross profit margin.
Gross profit decreased by 6.28% to N9.6 billion, while the gross profit margin fell to 18.64% in the first half of 2024, down from 28.74% in the corresponding period of the previous year.
The decline in gross profit margin suggests that Cadbury is facing higher input costs that it cannot pass on to customers through higher prices. This erosion in margin is concerning as it implies less profitability and potentially weaker financial health if the trend continues.
Given the mixed signals from Cadbury’s recent financial performance, the decision to buy, hold, or sell should be carefully considered.
The recent debt forgiveness, reduction in foreign exchange losses, and revenue growth are promising signs. However, the significant increase in production costs and declining gross profit margin are notable risks that must be addressed.
