Cadbury Nigeria Q2 2017 Results Review – Neutral Rating Maintained

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August 10, 2017/FBNQuest Research

Input cost pressures weighed on earnings
Cadbury Nigeria’s (Cadbury) 20.6% y/y sales growth in Q2 2017 was 9.1% ahead of our forecast. Both domestic and export sales were impressive, with 21.6% and 13.1% y/y increases. Despite the topline growth, the company recorded losses on both the PBT and PAT lines.

Gross margin contracted for the fifth consecutive quarter, reflecting increasing input cost pressures post the devaluation of the naira last year. Raw material and packaging costs as a proportion of COGS had increased by around 900bps y/y to 52% in 2016.

Cadbury also incurred a foreign exchange loss of N104.5m during the quarter. With bank overdraft increasing to N2.3bn from N151m as at end-2016, it appears the company is also having working capital issues. As such we have made significant cuts to our 2017-18E EPS forecasts.

However, our price target is unchanged at N11.9 due to the rollover of our valuation estimates to 2018. It implies a potential downside of -6.0% to current price levels. Although Cadbury shares have gained +23.4% ytd, it has underperformed both the sector and the NSE All share index by -36.4% and -18.5% respectively. We retain our Neutral rating on the stock.

Q2 2017 results recap
Similar to previous quarters, Cadbury delivered decent topline growth of 20.6% y/y to N8.2bn in Q2 2017. However, it recorded a pre-tax loss of – N862m, 80.7% worse than in Q2 2016. Although operating expenses were -4.5% lower y/y, the PBT was largely impacted by a -722bp y/y contraction in gross margin to 17.4%.

Net finance charges of –N183m vs a net finance income of N30m in the prior year also contributed to the loss. Post-tax loss of -N859m increased by 63.5% y/y. Sequentially, sales grew marginally, by 1.5% q/q. Domestic sales fell by -5.3% q/q to N7.3bn while export sales more than doubled by 131.6% q/q to N935m.

This implies that the company may have lost some market share over the quarter. Both pre and post-tax losses compare with profits of N96m and N93m in Q1 2017 respectively. The half year figures showed that sales were up 16.9% y/y while a pre-tax loss of –N766m compares with N216m profit in H1 2016. Again, gross margin contracted by -953bps y/y to 19.6%, offsetting a -5.0% decline in opex. With a zero tax expense, the post-tax loss of –N766m compares with a N147m profit in the prior year.