July 10, 2017/Cordros Capital

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CADBURY NIGERIA PLC (CADBURY) – BUY

 The shares of CADBURY lost 10.71% last week to close at N12.50. CADBURY trades at forward PE of 37.2x, above its 5-year historical average of 24.9x.

 Despite growing revenue by 13.3% y/y and reducing operating expenses by 6% y/y, CADBURY’s Q1-17 PAT fell by 86.2% y/y, way behind our -47% y/y estimate. The revenue growth was driven by relatively higher prices while lower opex reflects continued savings (+1.6% opex in 2016FY) following the implementation of zero-based budgeting system.

 The higher-than-expected decline in earnings follows bigger contraction of gross margin and a net finance of N24.8 million (vs. net income in Q1-16) reported during the period. While noting visibility constraint, our hunch is that the bigger-than-expected decline in margin could be mix, or energy related. While finance income fell 31% y/y, a finance charge of N62.2 million (vs. Nil in Q1-16) was reported against the N1.71 billion overdraft facility drawn during the period.

 Following the result, we have revised CADBURY’s 2017-18F EBITDA lower by 28% average, largely on more conservative expectation of margin recovery. And while TP has been consequently lowered to N15.06 (previously N16.10), we recommend a BUY on the stock.

DANGOTE SUGAR REFINERY PLC (DANGSUGAR) – SELL

 The shares of DANGSUGAR shed 3.33% last week to close at N8.70. DANGSUGAR trades at forward PE of 5.9x, below its 5-year historical average of 7.5x.

 DANGSUGAR reported Q1-17 revenue (82.5% y/y), EBITDA (13.8% y/y), and PAT (42.5% y/y) that were well ahead of Q1-16. Annualized, revenue and PAT are above consensus by 30.9% and 1.4% respectively. The revenue growth was driven by the significantly higher average price (121% y/y), which more than compensated for relatively lower sales volume (17% y/y). Management said it sold 174,981 tonnes of sugar during the period, 7% more than the 164,129 tonnes achieved in Q4-16, and 13% above our estimate.

 Also positively impacting PAT was the significant increase in investment income (N971.4 million vs. N7.1 million in Q1-16), enabled by growing cash generation, and consequent investments in short term, high interest yielding money market instruments. In addition, an amount of N122.5 million was reported as fair value adjustment on biological assets, compared to –N80.3 million in Q1-16. And while operating expenses increased by 29.1% y/y, it fell by 136 bps y/y as a proportion of revenue.

 Although gross margin improved from the trough of 7.3% in Q4-16, the 13.2% realized during the period was significantly shy of the 20% guided by management, and lower than our 14.7% estimate. Management had cited the (1) purchase of forex at a relatively lower average rate (compared to Q4-2016) and (2) higher output from Savannah where margins are higher, as the potential enablers of margin recovery.

 Overall, DANGSUGAR’s Q1-17 PAT is consistent with our strong growth expectation (22%) for 2017F. We look for lower PAT growth in subsequent quarters as narrowing y/y price differential (with sales volume unlikely to improve significantly from current level) forces revenue growth to taper. At current market price, we recommend a SELL on the stock.

FLOUR MILLS OF NIGERIA PLC – BUY

 The shares of FLOURMILL lost 15.98% to close at N22.78. FLOURMILL trades at 2018 PE of 10.4x, below its 5-year average of 19x.

 FLOURMILL released fourth quarter and 2016/17FY result last week. Compared to the loss we expected, Q4 PBT of N179 million (vs. N1.5 billion in Q3) was reported. A net operating gain of N10.3 billion (vs. N11.8 billion loss as at end-December, owing to FX gain of N7.54 billion) and a finance charge of N14.8 billion (vs. Cordros’ N4.7 billion) were the major surprises in the final quarter result. Overall, FLOURMILL reported net profit of N8.8 billion for the 2016/17FY, against a loss of N15.4 billion reported the previous year (excluding the gain on disposal of investment) and ahead of our estimate of N5.7 billion. The board has proposed a final dividend of N1.00, same as in the previous year.

 Revenue in Q4 grew by 70.5% y/y, the highest in all quarters of the year, but compared to the Oct-Dec period, revenue was almost flat. The Food division remained resilient, supported by the Packaging division which furthered the recovery from Q3.

 The first negative surprise from the Q4 result was the 287 bps y/y and 279 bps q/q declines in gross margin (GM) to 9.8%, the lowest during the year.