Culled—Proshare

November 7, 2016/FBNQuest Research

Headwinds weigh on earnings forecast
Cadbury Nigeria’s (Cadbury) Q3 2016 sales beat our forecast by 15.5%. In addition to base effects, our channel checks indicate that the company likely gained some share following price increases by close competitor Nestle for its Milo product during the quarter.

However, the company recorded losses compared with our forecast of profits as a result of significant gross margin contraction. Cadbury, like most consumer goods firms, is yet to overcome the negative impact of macro headwinds. The continued devaluation of the naira which moved further down to c. N305/US$ as of end-September (having fallen to N280/US$ as of end-June from N199/US$) weighed.

Production inputs such as sugar and milk are mostly imported. While sugar prices increased by 11.1% in Q3 (40.4% ytd), dairy prices rose by 11.3% (17.8% ytd) during the quarter. The impact of the reduction in gross margin neutralised the effect of cost savings the company has been able to achieve this year.

Operating expenses have declined y/y every quarter in 2016 to average -15.0%. On the back of the results, we have cut our 2016-17E EPS forecasts by 76% on average, and reduced our price target by 10.0% to N13.2 (implying a potential upside of 2.2%).

Cadbury shares are currently trading on a 2016E P/E multiple of 157.1x for EPS growth of 25.5% in 2017E. Although valuation is demanding, the cut to our price target is modest as we expect the company’s fundamentals to improve in the long term. The stock has shed -24.5% ytd (vs NSE ASI: -5.8%). We rate Cadbury Underperform.

Q3 2016 results recap
Cadbury’s Q3 2016 results showed that while sales of N7.4bn grew by 6.8% y/y due to base effects, the company recorded pre and post-tax losses of –N1.1bn and –N989m respectively.

The losses were driven by a gross margin contraction of -2,709bps y/y to 5.8%, offsetting a -22.3% y/y decline in opex to N1.5bn. On a q/q basis, sales were up 9.0% q/q while the pre and post-tax losses mirrored, although to a greater magnitude, the –N477m and –N526m losses on the PBT and PAT lines in the prior quarter. Moving on to the 9M 2016 numbers, sales grew marginally by 1.2% y/y to N21.3bn.

However, the company recorded losses before and after tax of -N842m. Although opex declined by -14.5% y/y to N5.5bn, a -939bp y/y contraction in gross margin to 21.0% had a more significant impact on profits.