Stocks To Avoid: Cadbury Nigeria

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  • As much as I love Bournvita (I prefer it to Milo and Ovaltine), I wouldn’t buy Cadbury Nigeria’s shares.

Why?

When you buy a company’s shares you are betting on two things: that the company is going to grow earnings/profit reasonably (reasonably for me means above 15% average annual growth rate for a Nigerian company except when there is an unusual economic or business situation like how recession hammered Nestle’s earnings) and that the company shares are reasonably priced.

Below is Cadbury Nigeria’s last 12 years Revenue and Net Profit trend.

Stocks To Avoid: Cadbury Nigeria - Brand Spur
Even if you say the recent recession has made business tough for FMCGs in the country, well, Cadbury Nigeria’s problems started before the recession. So I am not enthusiastic about its future earnings performance. It currently spends 77% of its revenue on Cost of Goods Sold (raw materials) with barely enough to cover its operating expenses. Yes, it’s understandable that the Naira crash impacted its input cost negatively but even before then it has been spending above its peers on raw materials as percentage of revenue.

Stocks To Avoid: Cadbury Nigeria - Brand Spur
Gross Margin (in %): Cadbury in Blue, Nestle in Yellow and Unilever in Red

As for its share price, I don’t see any bargain in it. The current return on assets is -2.82%, return on equity is -7.20% and return on investment is -5.20%. Yes, all those profitability ratios don’t make much sense once you are dealing with a net loss; my main concern is that I don’t see any radical positive turnaround in the near future for Cadbury Nigeria. I expect (hope) it goes back to profitability this year but not one big enough to take its current price as a bargain. It’s current market valuation is N23 billion and even if I were optimistic enough to say it will go back fast to profitability and generate as much profit (of N1.15 billion) as it did pre-recession period that would be giving it a P/E ratio of 20. 20! I can point out more than 20 companies with realized profits and a sure 2017 bigger profit selling at half that P/E ratio.

Stocks To Avoid: Cadbury Nigeria - Brand Spur
My Verdict
Except you are into short-term speculative gain making, you can easily do a lot better than investing in Cadbury Nigeria shares.

 

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Written by: Michael Olafusi