Cadbury Nigeria Plc reported an 8% year-on-year revenue decline in Q1’20, from N9.28bn in Q1’19 to N8.55bn on Q1’20. The weaker sales majorly resulted from a 21% decline in revenue from its refreshment beverages business segment, from N5.67bn in Q1’19 to N4.49bn in Q1’19. The refreshment beverages segment includes the manufacturing and sale of Bournvita and 3-in1 Hot Chocolate. We attribute the sales decline in the segment to the impact of waning demand, amid heightened competition in the market, notably from Nestle, Promasidor, and Novartis. We particularly posit higher pressures in its 3-in-1 Hot Chocolate product. The confectionery business segment, however, grew by 4% year-on-year, from N2.71bn in Q1’19 to N2.83bn in Q1’20; while the intermediate cocoa products grew by 37% year-on-year, from N904.56mn to N1.24bn in Q1’20.
Beyond the revenue decline reported in Q1’20, we noted the 37% spike in inventory levels (from N6.06bn as of FY’19 to N8.32bn as of Q1’20), as well as the 17% rise in trade and other receivables (from N4.53bn as of FY’19 to N5.32bn as of Q1’20). In our view, we think that the higher inventory levels possibly resulted from increased purchases towards the end of the quarter, to take advantage of the declining prices of cocoa in the global market. The decline in global demand, as well as global supply, resulted in a decline in global cocoa prices. According to data from the International Cocoa Organisation, cocoa prices fell by 14% from 2,720 per ton in February 2020 to 2,340 per ton in March 2020. We also noted that the 23% increase in trade payables provided the Company with some level of comfort to also increase credit sales to customers, without a significant impact on cash position. Cash flows from operations was positive at N271.73mn in Q1’20 compared to a negative operating cash position of N280.84mn in Q1’19.
Cost margin marginally decreased by a 100-basis point to 73% (Q1’19: 74%), resulting from a 9% year-on-year decline in cost of sales from N6.91bn in Q1’19 to N6.26bn in Q1’20. We link the lower costs incurred to lower volumes of goods sold during the period. Nonetheless, gross profit declined by 4% year-on-year, from N2.38bn in Q1’19 to N2.29bn in Q1’20.
Operating Efficiency at the Driving Seat
Despite the topline pressures, operating profit grew by 24% year-on-year, from N713.65mn in Q1’19 to N882.45mn in Q1’20. The higher growth in operating profit was driven by a 13% decline in operating expenses, from N1.71bn in Q1’19 to N1.48bn in Q1’20. As a result, the operating expense margin lowered from 18% in Q1’19 to 17% in Q1’20.
Further to the 100% decline in finance costs from N26.33mn in Q1’19 to zero in Q1’20, profit before tax grew by 26% year-on-year (from N723.93mn in Q1’19 to N912.77mn in Q1’20), despite a 17% decline in finance income (N36.61mn in Q1’19 vs N30.31mn in Q1’20). The Company’s effective tax rate remained flat at 30%, thus, profit after tax also advanced by 26% year-on-year, from N506.75mn in Q1’19 to N639.93mn in Q1’20.
We revise our EPS slightly from N0.72 to N0.75, resulting from our expectations of a lower cost of sales in subsequent periods of the year. Although we expect that revenue growth will remain under pressure, owing to weak demand and increased competition. We believe that further improvements in cost margin and operating expenses will provide some accretion to the bottom-line. In the near to mid-term, we see limited growth prospect for the Company, owing to the overall weak macro fundamentals.
We estimate a return on equity of 10% for the Company, which stands above its 5-year average ROE of 5%. Although we note the improvement in ROE, it does not cover the estimated cost of equity of 21%. In addition, the stock’s earnings yield stands at 11%, below the inflation rate of 12%. We forecast a dividend of N0.50 for FY’20 (FY’19: N0.49), which implies a dividend yield of 7%.
Our fair value estimate of the stock is N2.69 (previous: N3.23). The downgrade resulted from changes in the equity risk premium of the stock, which reflects the underlying risks associated with the Nigerian equity markets, given the current fundamentals. At the current market price of N6.90, the stock trades 61% premium to our fair value estimate.
WSTC Securities Limited