Weekly Stock Recommendation November 13, 2017-Cordros

November 13, 2917/Cordros Research

CADBURY NIGERIA PLC (CADBURY) – SELL

▪ The shares of CADBURY rose 22.06% last week to N12.34. CADBURY trades at a significant forward PE above its 5-year historical average of 24.9x.

▪ CADBURY published Q3-17 result, showing revenue growth of 9.3% y/y and PAT of N702 million, from a loss reported in Q2. Also worthy of note is that the reported profit is CADBURY’s single-quarter largest since Q4-15, thanks to significant expansion of gross margin.

▪ While top-line continued to grow, the slower growth pace compared to the last three quarters, and notwithstanding the still low base prices of Q3-16, suggest that sales volume may have been very low y/y. That said, revenue has grown 14.3% y/y in nine months, with Non-Nigerian sales up 25%.

▪ Gross margin of 30% was reported, as the technical fees (included in cost of sales) that significantly pressured margin in Q2 appears to have been fully settled. We note also the positive feed-through from both the continued stable exchange rate and softer cocoa prices (-6.83% Ytd and -4.82% compared to end-March in the international market).

▪ Although there was no finance charge in Q3-16, the N60 million reported in the review period was significantly lower than Q2’s N212 million (including FX loss of N105 million) which adversely impacted earnings during the period. Bank overdraft – which CADBURY has resorted to in recent quarters as a result of the devaluation impact on working capital – stood at N2.7 billion as at September ending, from N2.3 billion in June.

▪ CADBURY’s strong profit in Q3, following a negative surprise in Q2, leaves post tax loss after nine months at N64 million, from N766 million in H1. Compared to other quarters, CADBURY’s results have been more stable in Q4. We look for the same this year, suggesting – given a stronger than expected Q3 – the company’s earnings will likely close the year ahead of our previous estimate. That said, we do not expect investor will react accordingly to this result, given doubts as to the consistency of CADBURY’s performance. Our estimates are under review.

DANGOTE SUGAR REFINERY PLC (DANGSUGAR) – SELL

▪ The shares of DANGSUGAR lost by 0.97% to N15.25. DANGSUGAR trades at forward PE of 7.5x, in line with its 5-year historical average of 7.5x.

▪ DANGSUGAR recently released Q3-17 result, showing revenue declined 1% y/y while EBITDA (226% y/y) and PAT (244% y/y) grew strongly. Continued stronger gross margin and tamed opex, primarily, in addition to higher investment income, was the lever for earnings growth.

▪ The decline in revenue, was driven by lower sales volume, which more than offset the relatively higher price. Compared to 2016, sales volume has closed lower in all three quarters this year in response to the sharp increase in price (+75% in 9M-17 vs. 9M-16). The management reduced the per bag price of sugar by N1,000, effective in April, to help support sales.

▪ Gross margin increased by 68 bps q/q to 32.9% in Q3-17, but compared to the same period last year, gross margin was higher by 2,153 bps. The significant appreciation of the naira at the autonomous markets (where DANGSUGAR used to source most of its FX during the crisis period), increased access to cheaper USD from the CBN, and yet, the still elevated selling prices, have sustained margins.

▪ Overall, DANGSUGAR’s Q3-17 PAT is solid and adds to the strong growth delivered over H1. YtD, PAT is already well-above 12 months 2016 level and slightly ahead of our 2017F estimate. Our estimates are under review.

FLOUR MILLS OF NIGERIA PLC – HOLD

▪ The shares of FLOURMILL closed lower by 4.14% last week to N34.00. FLOURMILL trades at 2018 PE of 11.4x, below its 5-year average of 19x.

▪ FLOURMILL published Q2-17/18 and H1-17/18 results showing high double-digit growth in post-tax profit. The primary driver of the profit growth (as was the case in Q1) is a net operating gain of N1.92 billion, against a loss reported in Q2-16. That aside, gross profit was down 14% y/y while opex and finance costs increased by 13% y/y and 31% y/y respectively. Revenue grew by 9.8% y/y, the slowest pace since Q4-15/16, as pricing effect continues to taper. The y/y decline in gross profit was on the backdrop of faster increase in cost of sales (14.1%) and 331 bps contraction of gross margin (GM).

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