April 26, 2017/Cordros Research
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Cadbury Nigeria Plc (CADBURY) published Q1-17 result late yesterday, outperforming our estimate on revenue, but disappointed on earnings. PAT fell by 86.2% y/y, way behind our -47% y/y estimate. Principally, the decline in gross margin, both y/y and q/q, masked the positives — revenue growth and declines in operating expenses (opex) and opex margin — we observed in the result.
Revenue grew by 13.3% y/y (vs. Cordros’ 7% y/y), driven essentially by relatively higher prices. We noted in our last update that CADBURY increased prices on some SKUs during the review period, in addition to the increases implemented in the second half of last year. Noting the limited detail on sales volume, it is obvious from the y/y revenue growth, which is well-behind the upper double-digit y/y mean price differential, that CADBURY may have reported lower volume during the period.
Also on the positive, opex fell by 6% y/y while opex margin contracted by 1161 bps relative to Q1-16. Against Q4-16, opex and opex margins fell by 25% and 573 bps respectively. The reported opex is 10% behind our estimate while the margin of 20% beat our 24% estimate. CADBURY’s continued containment of opex (+1.6% opex in 2016FY), perhaps benefiting from the implementation of zero-based budgeting system, is impressive, considering the persisting inflationary environment.
That said, while the y/y decline in gross margin is consistent with our expectation, the q/q contraction is disappointing, as it (1) deviates from the increases (in the range of 28-255 bps) we have observed from the recently announced FMCG Jan-Mar results and (2) fails our “litmus test”, which used Q4-16 gross margin as the benchmark for our universe of consumer goods. While noting visibility constraint, our hunch is that the q/q decline in margin could be mix or energy related, considering the relatively softer essential raw material input prices (cocoa -14.6%, Sugar -16.4%, and dairy products -1.5%).
A net finance cost of N24.8 million was reported during the period, against a net income of N54.1 million in Q1-16. Following the N17.8 million recorded in Q4-16 (the first since Q3-14), CADBURY reported a higher finance charge of N62.2 million in Q1-17. The charge follows a N1.71 billion overdraft facility drawn during the period. For the first time since returning excess capital to investors in 2013, CADBURY assessed short term debt facilities for working capital support in 2016.
While the decline in CADBURY’s PAT is consistent with expectation, investors are likely to react negatively to the wider decline, especially given that some FMCG companies (NB and UNILEVER) have impressed during the same period. CADBURY’s shares are down 9.62% YtD, but have accumulated 25.5% since the 2016FY result was announced. Our estimates are under review.
