Cadbury Nigeria – Challenging Macroeconomic Environment Disrupts Momentum


Cadbury Nigeria Plc recently released its H1’20 results. According to the released results, revenue declined by 28% year-on-year in Q2’20, from N10.17bn in Q2’19 to N7.36bn in Q2’20.

In our view, although revenue declined also by 8% in Q1’20, we think that the steep 28% revenue decline in Q2’20 reflected the impact of the COVID-19 pandemic.

The sit-at-home directive and lockdown directive by the Federal Government resulted in a decline in economic activities, as offices, schools, and several other enterprises remained shut for the most part of Q2’20.

We also posit that the resulting effect of possible job losses and by extension, lower household income and consumption resulted in lower demand for the Company’s products in Q2’20. In addition, the sustained border closure, in our view, also had its impact on the distribution and sale of products across markets.

H1’20 revenue declined by 18% YoY, which was a combination of an 8% revenue decline in Q1’20 and a 28% revenue decline in Q1’20.


Exchange Rate Pressures Drive Profitability Southwards

Cost of sales declined by 25% YoY from N8.41bn in Q2’19 to N6.34bn in Q2’20. However, despite the decline in cost of sales in absolute terms, cost margin rose by 300 basis points from 83% in Q2’19 to 86% in Q2’20. We attribute the higher cost margin to the devaluation of the exchange rate.

Consequent to the higher cost margin in Q2’20, gross profit declined by 42% YoY from N2.29bn in Q2’19 to N1.02bn in Q2’20. Operating expenses declined by 25% YoY from N1.59bn in Q2’19 to N1.19bn in Q2’20.

The decline in operating expenses was driven by a 30% YoY decline in selling and distribution expenses from N1.27bn in Q2’19 to N887.13mn in Q2’20. Meanwhile, the decline in revenue was steeper than the decline in operating expense.

Therefore, the Company reported an operating loss of N167.75mn in Q2’20, from an operating profit of N175.12mn in Q2’19. Profit before tax declined from N233.12mn in Q2’19 to a loss of N146.11mn in Q2’20.

In a similar trend, profit after tax declined from a profit of N163.18mn in Q2’19 to a loss of N102.27mn in Q2’20.


We revised our FY’20 projections to reflect current realities in the operating environment. The illiquidity in the foreign exchange market is a major risk faced by the Company in sourcing for raw materials for production. The Coronavirus pandemic is also a bottleneck to the growth of the business.

Although we expect to see a gradual resumption in economic activities in the subsequent quarters of the year, we believe that recovery will be slow. On the back of a lower revenue projection in combination with expected higher costs, we revise our FY’20 EPS from N0.75 to N0.13.


We also revise our cost of equity downwards from 21% to 15%. The rationale for the downward revision is due to a lower risk-free rate used in our computation. Notably, yields in the fixed income market have declined significantly between our last earnings report and as of the writing of this report.

Using a combination of Discounted Cash Flow (DCF) and Dividend Discounted Model (DDM) valuation methodologies, we arrived at a fair value of N2.80. At current market price, the stock trades at a 58% premium to our fair value. Hence, we believe that the stock is overvalued. Therefore, we maintain our SELL recommendation.


WSTC Research