Cadbury Nigeria Q4 2020 Performance Dilutes Recovery Efforts

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Cadbury Nigeria reported a 10% YoY revenue decline in its FY 2020 earnings performance, attributed to the negative impact of the coronavirus pandemic in the Nigerian market, and across the global markets.

Operating profit dipped by 79% YoY from N1.36bn in FY 2019 to N282mn in FY 2020, on the back of higher operating costs. The combination of an exchange rate devaluation in 2020, and a rising inflationary trend, weighed negatively on margins.

Hence, as a result of lower revenue and higher operating cost margins, the Company’s profitability nosedived. Profit before tax declined by 73% YoY from N1.54bn in FY 2019 to N408mn in FY 2020. Meanwhile, a N524mn tax credit earned by the Company moderated the net income decline to 13% YoY from N1.07bn in FY 2019 to N932mn in FY 2020. The Company, nonetheless, declared an N0.18 dividend (FY 2019: N0.49).

Coronavirus Pandemic Induce Heavy Decline in Export Sales

On a segmental breakdown, the Refreshment Beverages, which accounts for about 60% of total revenue, declined by 7% YoY from N23.15bn in FY 2019 to N21.59bn in FY 2020. In our view, we link the revenue decline to the decline in economic activities for a significant part of the year (notably in Q2 2020) due to the lockdown and other forms of social distancing measures implemented by the national authorities, in efforts to flatten the COVID curve. In a similar trend, the Company’s Intermediate Products (consisting of the sale of cocoa powder, cocoa butter, cocoa liquor, and cocoa cake), recorded a 40% YoY decline from N4.68bn in FY 2020 to N2.83bn in FY 2021.

We attribute the revenue decline in this segment to the inability of the Company to export its products, owing to the closure of borders of other countries during the peak of the coronavirus pandemic. The decline in the Refreshment Beverages and Intermediate Products was responsible for the overall decline in total revenue in FY 2020.

Cadbury Nigeria: Exchange Rate Devaluation Pull Margins Downwards

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On the back of an exchange rate devaluation by the monetary policy authorities during the financial period, the Company’s input costs rose, thus resulting in a 400 basis points increase in cost margin from 79% in FY 2019 to 83% in FY 2020. As a result, gross profit declined by 29% YoY from N8.33bn in FY 2019 to N5.89bn in FY 2020.

Gross margin lowered from 21% in FY 2019 to 17% in FY 2021. In our view, we believe that the macroeconomic challenges, relating to loss of jobs, shrinking household disposable income, and heightened competition made it an uphill task to raise prices during the financial year.

Cost Optimisation Partially Supports Shrinking Margins

Operating expense declined by 18% YoY from N7.03bn in FY 2019 to N5.74bn in FY 2020. The drivers of the operating expense decline were lower advertising and sales promotion expense (-41% YoY from N4.43bn to N2.62bn). We believe that the downturn in economic activities resulted in the decline on this line.

The Company also incurred 56% lesser expense on royalty, technical service, and management fee to Mondelez International AMEA PTE Limited and other related companies. We think that the decline recorded on the technical service, and management fee line was a one-off event.

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Given the lower expenses incurred in FY 2020, operating expense lowered by 200 basis points from 18% in FY 2019 to 16% in FY 2020. Nevertheless, the Company’s bottomline declined, owing to the impact of a steeper decline in operating income.

Delayed Payment to Creditors Boost Cash Flows

Net operating cash flow increased by 80% YoY from N3.49bn in FY 2019 to N6.28bn in FY 2020, largely driven by a N1.80bn delayed payment to creditors during the period. In addition, the Company recorded an improved collection from its debtors, as reflected in the 15% YoY decline in trade and other receivables. The Company’s inventory levels also declined by 14% YoY. By implication, working capital improved during the period, and it factored in the form of higher cash flows generated from operations.

The Company obtained a N3.45bn loan during the period. The loan represented a US$22.20mn import finance facility with two banks to meet the importation needs of the Company. The debt-taking and the higher cash generated from operations drove the total increase in the Company’s cash levels from N4.43bn in FY 2019 to N11.12bn in FY 2020.

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