March 20, 2018/Cordros Report
Update: We update on CADBURY with a TP of NGN10.96 (29% downside) and maintain SELL recommendation. Despite having a challenging 2017FY, contrary to the rest of our consumer goods universe, the company reported a net profit of NGN300 million, from a loss in 2016FY. We forecast net profit to grow by 38% in 2018E, equating to DPS of NGN0.22/share. On our revised estimates, CADBURY is trading at 2018F P/E multiple of 65.6x, a significant premium to the 5-year historical average of 31.1x.
Modest revenue growth in 2018E: We forecast revenue growth to moderate to 8% in 2018E, from 10.3% in 2017FY. As with the industry, we expect revenue growth this year to be largely volume-driven. And specifically, for CADBURY, we look for management backing sales with a lot of promotional activities, including price discounting, given intense competition, especially in the Food Beverage segment.
Dour gross margin outlook: For us, CADBURY’s gross margin outturn – excluding the one-off spring to 30% in Q3-17 – was impressive in 2017FY. We think this is down to prices, which management needed to keep competitive in order to support revenue.
On the other hand, we forecast EBIT margin to increase to a 2-year high of 3.4%, but still below the 5-year historical average of 7%. Opex has been well-contained in the last two years, including the ratio to revenue which fell to record-low 20.6% last year.
Balance sheet: Although we project finance costs will be higher relative to 2017FY (we estimate average interest rate on ST debt to be 22%), borrowings will be lower by end-2018E, as the sizeable settlement of trade payables in Q4-17 frees new cash for debt repayment.