July 30, 2018/Cordros Report
Update: CADBURY released Q2-18 result, with a loss after tax of NGN455 million. We had expected a loss of NGN740 million. The result shows welcome growth in revenue and double-digit decline in opex, offset by significantly lower gross margin. Though the post-tax loss was lower than we expected, we cut our EPS estimate for 2018E, on higher downward revision of gross margin (-285 bps) than we reduced opex (-150 bps).
In-line Q2-18 revenue; 2018E growth estimate unchanged: The reported Q2-18 revenue was ahead of Q1-17 by 13.7% and beat our estimate by a marginal 0.3%. At current run-rate, we believe the company’s revenue is in line with our 8% growth forecast for the year. We believe the revenue growth was largely volume-driven, as we are not aware of any price increase during the reference period. Whilst noting the aggressive sales drive going on mainly at the retail level – for Bournvita especially – we believe Ramadan-related consumption may have also boosted sales volume during the period. Domestic sales rebounded with a growth of 8% y/y (-0.5% y/y in Q1-18), while Exports grew by 59% y/y (vs. 102% y/y in Q1-18).
We cut gross margin estimate lower: At 10.9% in Q2-18, the achieved record-low gross margin (lowest since Q3-16) came in way below our 17.4% estimate. The lower outturn confirms our stance since the beginning of the year, that CADBURY’s 2018E gross margin is unlikely to beat the 22.5% rate achieved in 2017FY. We consequently revise gross margin estimate for the year lower to 19.7% (from 22.5%), while reiterating (1) selling price competition and (2) rising cocoa prices (+20% YtD) as headwinds, and (1) stable FX and (2) soft sugar (-26% YtD) and dairy (-8% YtD) prices as tailwinds.
Both opex (-37% y/y and -17.8% q/q) and the margin (-1155 bps y/y and -536 bps q/q) came in surprisingly lower at NGN1.33 billion and 14.3% respectively. Notwithstanding, we cut our opex estimate for 2018E only marginally, while we wait for clarity on this line – we suspect that the traditionally low opex in Q4 may not come through this year. That said, we should mention that keeping opex lower is an aspect that CADBURY’s management has performed better in recent years of strong pressure on market share and revenue.
Balance sheet: The balance of borrowings stood at NGN2.37 billion (vs. NGN4.3 billion in Q1-18), comprising solely drawn-down bank overdraft facility. This produced finance charge of NGN184 million, below the NGN195 million we estimated. And as expected, finance income grew q/q (+80%), but still trailing our expectation (NGN47 million vs. NGN73 million respectively). We made no changes to these lines. Capex stood at NGN232 million, much lower than the NGN699 billion spent as at H1-17.
Estimate and valuation: The net impact of the changes to our model is a cut to both our EPS estimate to NGN0.06 (from NGN0.24 previously) and TP to NGN10.00 (NGN10.96), with HOLD rating. CADBURY’s stock has lost 26% since we updated on Q1-18 result, with a SELL rating. On our estimates, CADBURY is trading at forward (2018E) P/E multiple of 175.4x, a significant premium to its five-year historical average of 31.3x.