June 11, 2018/Cordros Capital

CADBURY NIGERIA PLC (CADBURY) – SELL

▪ The shares of CADBURY rose by 1.20% to tNGN12.65. CADBURY trades at a significant forward PE above its 5-year historical average of 24.9x.

▪ CADBURY published Q1-18 result, showing EBIT was higher by 76.2% while PBT was lower by 67.2%, both compared to Q1-17. We are not surprised by the lower PBT, which we had expected will be impacted by higher finance charges (+233% y/y), given the sizeable balance of borrowings at the beginning of this year, compared to 2017. Meanwhile, the reported PBT missed our estimate by 49%, owing specifically to the deviation on finance income line (46% below our estimate), but we expect this will normalize in subsequent quarters.

▪ Q1-18 revenue grew 2% y/y, consistent with our 1.8% growth estimate. Given base selling price is lower by marginal single-digit, we estimate flat to modest volume contraction must have been recorded during the just concluded quarter, compared to last year. Retaining our 8% revenue growth estimate for 2018E suggests we look for a faster growth in subsequent quarters, and will be largely volume-driven, on continued promotional activities, including price discounting. We are aware of an ongoing buy-1-get-1 free promo for the 450g Bournvita Hot Chocolate Drink.

▪ At 21.8%, CADBURY’s gross margin in Q1-18 is in line with our 21.9% estimate for the quarter, and 3 bps higher vs. Q1-17. We had stated in our last note on the company that we do not expect gross margin will be above the 22.5% rate achieved in 2017FY, and this view is unchanged. Margin headwinds are selling price competition (on stronger imports) and rising cocoa prices, while the tailwinds are stable FX and soft sugar (-28% YtD) and dairy prices (-6% YtD).

▪ The balance of short term borrowings was NGN4.3 billion, from the NGN3.6 billion at the beginning of the year. CADBURY’s loans are expensive (we estimated 22% at the end of 2017FY), and we are not aware that they are being refinanced through commercial papers in this period of generally declining interest rates. Finance cost in Q1-18 is in line with our estimate. Finance income was lower, but we expect this would increase and converge with our estimate for the year, as cash grows following the payment of 2017FY dividend.

▪ We maintain TP at NGN10.96. Our estimates are unchanged. On our estimates, CADBURY is trading at 2018F P/E multiple of 61.5x, a significant premium to the 5-year historical average of 31.1x.

DANGOTE SUGAR REFINERY PLC (DANGSUGAR) – SELL

▪ The shares of DANGSUGAR closed higher by 14.61% to NGN20.00. DANGSUGAR trades at forward PE of 7.6x, lower than its 5-year historical average of 7.5x.
▪ DANGSUGAR published Q1-18 result, showing EPS grew 12% y/y but declined 59% q/q. The EPS growth came on the back of a higher gross margin compared to last year’s one-off low, masking a disappointing revenue performance. Should we adjust Q1-17 gross margin to Q1-18’s 25% (which is also the average achieved in 2017FY), we have EPS of -55% y/y and -60% q/q.

▪ According to management, Q1-18 sales volume was down 12% y/y (+2 q/q), despite selling price now lower by about 22% y/y. The volume outturn raises concern for 2018 revenue as a whole, given that the January-March quarter (and indeed, the first half) is seasonally strong for DANGSUGAR. On the 2017FY results call, management reiterated some of the volume concerns we had highlighted in previous notes – notably the activities of smugglers and the poor condition of the factory road – and added that the road to the North (accounting for 36% of revenue and where about the highest margin is derived) is equally deplorable, with negative impact on revenue.

▪ Also of concern is that the NGN13,056/tonne average selling price computed by management in the latest result is way below the NGN14,000/tonne price it said it was able to achieve during the last call held earlier this month. We have consequently revised our 2018E volume growth forecast to 5% (previously 9.5%) and cut average selling price estimate to NGN13,000/tonne – while acknowledging that the possibility of price further reducing has increased with the poor volume outturn in Q1.

▪ At 25%, the gross margin achieved in Q1-18 is about the 25.8% we estimated for 2018E. While noting that the downside risk to selling price, and consequently margin, has increased with this Q1 result, we should reiterate some tailwinds supporting our gross margin estimate as: (1) better energy mix, (2) stable and stronger exchange rate, (3) stable outlook of global raw sugar prices, and (4) positive mix from growing contribution of higher margin Savannah.

▪ We revise TP lower to NGN17.42 (previously NGN17.97). On our estimates, DANGSUGAR is trading at 2018F P/E and EV/EBITDA multiples of 7.6x and 4.x respectively, consistent with its five-year historical averages of 7.9x and 4.4x, but below the 14.3x and 9.4x Middle Eastern peer averages.

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