Friday, October 22, 2021

    Cadbury Nigeria: Cold Earnings Debut Prompts Hold Rating

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    Following the pandemic-induced economic stress in 2020, Cadbury Nigeria Plc. earnings record turnout cold as analyst observed subdued demand weighs heavily on product sales.

    In its earnings guidance for the first quarter of 2021, Meristem Securities expects the company’s earnings to drop by about 8%.

    “Cost pressure remains a clog to profitability. Volatility on stock price is expected, with overriding bearish sentiments”, analysts at the investment firm said in a new release.

    After projecting reduced earnings per share for 2021, analysts at said that the fast moving consumers’ goods operator’s performance mirrored the impact of the slowdown in economic activities amidst challenges posed by the coronavirus pandemic, and sustained pressure on consumer wallets.

    According to its audited report for 2020, Cadbury Nigeria recorded a decline in all its product segments, hence, revenue dipped by 9.97% year on year to NGN35.41 billion from NGN39.33 billion in 2019.

    Notably, analysts said last year’s revenue decline represents the company’s first topline contraction since 2015. This was driven by 6.71% decline recorded in refreshment beverage sales, which historically contributes about 58.22% to overall revenue.

    Adding to the pressure, revenue generated from Confectionary products also fell by 4.46% year on year.

    Meristem Securities explained that intermediate cocoa products – the company’s major source of export earnings – plunged due to challenges associated with the land border closure.

    Cadbury Nigeria Plc reported that revenue from intermediate cocoa products plunged 39.54% year on year to NGN2.83 billion, from NGN4.69 billion in the prior year.

    “We envisage a rebound in cocoa exports flowing from the Federal Government’s decision to reopen the country’s land borders in December 2020.

    “For local demand, we posit that a gradual recovery of economic activities and sustained improvement in the company’s route to market strategy would support domestic sales over 2021”, analysts stated.

    Appraising the development, Meristem Securities forecasted a 11.50% growth in revenue to NGN39.48 billion for 2021 from NGN35.41 billion in 2020.

    Cost Management Fails to Save Bottomline

    Despite the 6.31% increase in raw material costs during the year, total production costs fell by 4.82% to NGN29.51 billion from NGN31.00 billion in 2019.

    Meristem Securities explained that this moderation however failed to reflect in the company’s cost to sales ratio, which climbed to 83.34% from 78.83% in 2019.

    Hence, Cadbury’s gross margin also contracted to 16.66% from 21.17%.

    As part of cost cutting efforts, Cadbury Nigeria slowed down on advertising and sales promotion, the expense line was slashed 40.90% and recorded 55.83% decline in both technical services and o38.65% cut from office consumable expense.

    The management costs cutting eventually drove down the company’s operating expenses by 18.88% to NGN5.73 billion in the pandemic year.

    Analysts recognised that the moderation in operating expenses reveals the company’s efforts at containing costs amidst spiraling inflation and COVID-19 induced disruption to its operations.

    While gains from the disposal of property, plant, and equipment totaling NGN67.66 million provided some support, operating profits however dropped to NGN281.82 million, from NGN1.35 billion in the previous year.

    The company’s financial statement showed pre and post-tax profile plunged by 73.48% and 12.98% year on year respectively. Profit after tax (PAT) settled at NGN931.82 million (implied EPS: NGN0.50).

    “In 2021, the drive to push volumes and our expectation of higher raw material prices inform our 5.52% uptick in production costs.

    “We also considered the likelihood of the CBN’s plan to include sugar (and wheat) in its FX restriction list – a move that could translate to a climb in production costs, crystallizing in the near to midterm”, Meristem stated.

    After carefully considering these factors, analysts at Meristem Securities forecasted that 2021 net income would settle at NGN1.10 billion – 18.81% higher than the NGN931.83 million recorded in 2020.

    Fresh Debt Supports Liquidity

    While the company has maintained a low levered balance sheet over the years, analysts recognised the management obtained NGN3.45 billion finance facility towards the end of 2020, to meet its importation needs.

    As a result of the borrowing, Cadbury Nigeria Plc.’s cash balance improved by 150.96% to NGN11.11 billion, while total debt ratio expanded to 0.10x.

    Then, cash and quick ratios showed an improvement from previous levels, ticking up to 0.77x and 1.05x from 0.45x and 0.92x respectively, signaling better liquidity to cover short-term obligations.

    “We project a 2021 expected EPS of NGN0.59 and a target price earnings of 13.84x, which yields a price target of NGN8.16, and an implied 4.60% upside potential at reference day. Hence, we rate the ticker a HOLD”, analysts stated.

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