August 5, 2016/Cordros Research
CADBURY’s second quarter (April to June 2016) loss caused H1-16 profits to drop by 78% from Q1-16. The loss after tax in Q2-16 resulted from a combination of (1) cost inflation, which compressed gross margins by over 800bps (y/y and q/q), and (2) a decline in revenue, driven by lower sales volume.
Over H2-16, despite the likelihood for sustained pressure on costs, CADBURY’s management may choose to reclaim market share over margins. Already, prices had been increased about 3x in the first half and NESTLE’s ongoing plan to hike the price of MILO by between 13-15% (despite 15% hike in H1-16) could compel consumers to trade down to cheaper competitors (mainly BOURNVITA). Besides, CADBURY has far lesser exposure to forex pressure compared to NESTLE, and is therefore in a less desperate situation to ramp up margins in the nearer term.
Overall, the outlook for revenue is positive, as a combination of expected flat prices and consequent gain in market share, alongside in roads from the ongoing aggressive promotion of new/relaunched products, and the impact of seasonality, speaks to recovery through volumes in the second half.
Compared to the first quarter, opex rose by 26.8%. The ongoing sales promotions in selected cities across the country, which also involves transportation costs from fuelling mini sales vans and tricycles, point to higher opex in H2-16.
Overall, we look for 2016FY revenue growth of 7% (previously 6%) but have revised EBITDA and PAT to decline by 18% and 47% respectively, from 18% and 39% growth previously. We have cut 2016FY TP by 25% to N19.82.
The stock recovered from the YtD low in January to accumulate 45% gain at the end of June, supported by some optimism following Q1-16 results, but more by the general speculation that drove local equities prices higher. CADBURY is currently trading on a consensus 12M FPE of 14.5x, at 14% discount to EM Asia peers but at 12% premium to its SSA peers. While 2017-2020 earnings are expected to remain at sub 2013 levels, we believe investors have more than reacted negatively to CADBURY’s shares which are currently undervalued. BUY.
