Culled—Proshare

March 30, 2017/FBNQuest Research

9% reduction to our price target
Cadbury Nigeria’s (Cadbury) Q4 2016 results rounded off a challenging 2016. Despite strong topline growth during the quarter, which was around 40% ahead of our estimate, and a recovery from losses in prior quarters (–N477m and –N1.1bn in Q2 & Q3 respectively), for the full year the company reported a pre-tax loss of N563m.

Although tough trading conditions and reduced consumer spending due to rising inflation took their toll, the dominant headwind was the impact on inputs of the devaluation of the naira which fell to N280/US$ as of end-June from N199/US$ and around N305/US$ as of end-September.

More so, compared with peers, Cadbury is less able to withstand these pressures due to its limited product offering – a situation we do not see changing in the near term.

Following the results, we have reduced our 2017-18E earnings forecast by -21.8% on average and cut our price target by -9.0% to N12.1.

Although our new price target shows a 58.7% upside potential from current levels, without any guidance from management on earnings, we prefer to remain cautious and limit the upgrade to our recommendation to Neutral from Underperform.

The upside potential largely reflects the significant sell-off in the shares over the last 15 months: having shed –40.0% in 2016, ytd they are down a further -26.1%.

Q4 2016 results recap
Cadbury grew its Q4 2016 sales by 28.2% y/y to N8.7bn (the company’s highest in 3 years) while PBT of N279m was -81.8% lower y/y. Topline was boosted by prices increases as well as slower demand for imported competition.

However, the naira devaluation impact on Cadbury’s raw material costs for key inputs resulted in a gross margin contraction of -990bps y/y to 27.5%. Operating expenses increased by 91.2% y/y following the company’s aggressive marketing initiatives.

Cadbury’s PAT of N822m grew by 11.0% y/y, and came in higher than its PBT due to a tax credit of N266m and other comprehensive income of N276m. The q/q results showed sales growth of N16.8% q/q. Gross margin expanded by 2,179bps y/y, largely due to base effects.

The relative stability of the naira in Q4 compared with previous quarters probably helped also. The full year results showed that sales grew 7.7% y/y.

However, a gross margin contraction of -921bps y/y to 22.9% more than offset a 188.3% rise in other operating income to lead to a pre-tax loss of –N563m (vs N1.6bn profit in FY 2015). The post-tax loss was reduced to –N20m by a tax credit and other comprehensive income of N543m combined.