CADBURY NIGERIA PLC: Stiffer competition and declining finance income dampen 3-month results

Cadbury Nigeria Plc is a manufacturer and seller of fast-moving consumer goods in Nigeria. The Company’s confectionery and food drinks segment produces and sells confectionery products and food drinks under the Bournvita, Tom Tom, Ahomka ginger, Hacks, and the Buttermint brands. In addition, Cadbury Nigeria’s intermediate Cocoa Products segment produces and sells cocoa powder, cocoa butter, cocoa liquor, and cocoa cake.

The financial performance of Cadbury Nigeria Plc for the full-year ended December 2013 was commendable in the face of a tight monetary environment, leading to low consumer purchasing power and heightened competition in the consumer goods sector of the economy.  Although revenue growth was moderate at circa 7% year-on-year, after-tax profit grew significantly by 79.79% due to the Company’s success at operating cost management. However, the result for the 3 month period ended March 2014 indicated a stark departure from the positive performance of the 12 months to December 2013. The Company’s revenue declined by double-digits in March 2014 and a reversal of the 2013 cost control trend led to an even greater year-on-year decline in net income for the period.

For the first quarter ended March 2014, Cadbury Nigeria reported a decline of 17.24% in revenue to N6.92 billion from N8.36 billion at the end of the 3 months period ended March 2013. An increase in competition within the sector, continuing insecurity in the Northern region of the country, and a less favourable macro-economic situation contributed to the Company’s performance during the period. Nevertheless, the Company was able to record a reduction in cost of sales, declining by 20.57% to N4.06 billion in March 2014, from N5.11 billion in March 2013. According to the Company’s management, the reduction in sales cost is in part a testament to the effectiveness of the new Multi-Energy Vapour Absorption Chiller, which utilizes exhaust fluent gas that was formerly discarded.

However, despite the decline in sales costs, gross profit fell by 12.00% to N2.86 billion in the first quarter ended March 2014, from N3.25 billion in the corresponding period of 2013, a lower decline compared to the reduction in revenue due to more decline in cost of sales.

Pre-tax profit declined by a more marked 31.31% relative to the reduction in gross profit to N1.15 billion in March 2014 from N1.68 billion in March 2013. This was principally due to the decline of 43.64% in net finance income to N274.59m in March 2014 from N487.23m in March 2013. Although no finance expenses were charged to the Company’s books in the current period, a decline of 46.90% in finance income to N274.59m from N517.12m led to the significant reduction in net finance income.

Net income also declined but by at a slightly slower rate than pre-tax profit, as it fell by 29.41% to N805.81m at the end of the first quarter of 2014 from N1.14 billion in the corresponding period of 2013, thanks to a decline in tax expenses by 35% to N345.35m from N534.37m over the period. Effective tax rate also dipped slightly to 30.00% in the current period from 31.89% in the period ending March 2013. Earnings per share (EPS) however grew by 19.44% to N0.43 in March 2014 from N0.36 in March 2013 as a result of capital reduction exercise carried out by the Company in 2013 thereby reducing the Company’s outstanding shares by 40% to 1.88 billion shares from 3.13 billion shares over the period.

With regards to profit margins, the gross profit margin increased from 38.85% in March 2013 to 41.31% in March 2014 due to the reduction in cost of sales while pre-tax and net income margins both decreased to 16.63% and 11.64% from 20.04% and 13.65% respectively over the period, as the lower net finance income for the period applied downward pressure on pre and after-tax profit margins.

The Company’s total assets declined by 28.76% to N30.76 billion as at March 2014 from N43.17 billion at the end of December 2013. The decline was a result of the reduction of 79.13% in cash and cash equivalent of N3.70 billion from N17.75 billion over the period. The cash was used to buy-back some of the Company’s outstanding shares during the capital reduction exercise leading to a decline of 46.23% in shareholders’ to N12.90 billion at the end of March 2014 from N23.99 billion as at December 2013.

Due to a similar rate of decline in the Company’s net income and total assets, return on assets (ROA) remains flat at circa 2% between December 2013 and March 2014 while the Company’s return on equity (ROE) benefited from the greater decline in equity than in net income, growing to 6.25% as at March 2014 from 4.76% as at March 2013.

The 2013 operating year for consumer goods companies was one beset by economic challenges such as the continued poor state of transport infrastructure, insecurity, high input costs and unreliable power supply. Despite the harsh environment over the 12 month period in 2013, turnover grew due to sustained demand for key Cadbury’s brands that hold leading positions in their respective market categories. Nonetheless, decreasing market share due to strong competition in the first quarter of 2014, and an inability to control costs more meaningfully over the period, indicate to us that the 2014 financial year is unlikely to repeat the marked net income growth recorded in 2013.

Factoring in our expectations for the current financial year, with respect to intense rivalry in the sector, and insufficient evidence of the Company’s capacity to control costs substantially, we revise our full-year December 2014 revenue and net income estimates to N32.15 billion and N6.51 billion respectively. As such, we project a 6-month EPS of N3.47. With the aid of the justified P/E valuation method and a peer P/E ratio of 24.44x, we estimate a 6-month stock price of N84.81, which represents an upside of 6.01% on the current stock price, and results in our revised HOLD recommendation on the shares of Cadbury Nigeria Plc.

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