September 3, 2018/Cordros Update

CADBURY NIGERIA PLC (CADBURY) – HOLD

▪ The shares of CADBURY dipped 0.50% to NGN10.05. CADBURY trades at a significant forward PE above its 5-year historical average of 24.9x.

▪ CADBURY released Q2-18 result, with a loss after tax of NGN455 million. We had expected a loss of NGN740 million. The result shows welcome growth in revenue and double-digit decline in opex, offset by significantly lower gross margin.

▪ The reported Q2-18 revenue was ahead of Q1-17 by 13.7% and beat our estimate by a marginal 0.3%. At current run-rate, we believe the company’s revenue is in line with our 8% growth forecast for the year. We believe the revenue growth was largely volume-driven, as we are not aware of any price increase during the reference period. Whilst noting the aggressive sales drive going on mainly at the retail level – for Bournvita especially – we believe Ramadan-related consumption may have also boosted sales volume during the period. Domestic sales rebounded with a growth of 8% y/y (-0.5% y/y in Q1-18), while Exports grew by 59% y/y (vs. 102% y/y in Q1-18).

▪ At 10.9% in Q2-18, the achieved record-low gross margin (lowest since Q3-16) came in way below our 17.4% estimate. The lower outturn confirms our stance since the beginning of the year, that CADBURY’s 2018E gross margin is unlikely to beat the 22.5% rate achieved in 2017FY. We consequently revise gross margin estimate for the year lower to 19.7% (from 22.5%), while reiterating (1) selling price competition and (2) rising cocoa prices (+20% YtD) as headwinds, and (1) stable FX and (2) soft sugar (-26% YtD) and dairy (-8% YtD) prices as tailwinds.

▪ The balance of borrowings stood at NGN2.37 billion (vs. NGN4.3 billion in Q1-18), comprising solely drawn-down bank overdraft facility. This produced finance charge of NGN184 million, below the NGN195 million we estimated. And as expected, finance income grew q/q (+80%), but still trailing our expectation (NGN47 million vs. NGN73 million respectively). We made no changes to these lines. Capex stood at NGN232 million, much lower than the NGN699 billion spent as at H1-17.

▪ The net impact of the changes to our model is a cut to both our EPS estimate to NGN0.06 (from NGN0.24 previously) and TP to NGN10.00 (NGN10.96), with HOLD rating. CADBURY’s stock has lost 26% since we updated on Q1-18 result, with a SELL rating. On our estimates, CADBURY is trading at forward (2018E) P/E multiple of 175.4x, a significant premium to its five-year historical average of 31.3x.

DANGOTE SUGAR REFINERY PLC (DANGSUGAR) – HOLD

▪ The shares of DANGSUGAR closed higher by 7.14% to NGN15.75. DANGSUGAR trades at forward PE of 6.9x, lower than its 5-year historical average of 7.5x.

▪ We update on DANGSUGAR following the release of the Q2-18 result, wherein revenue and net profit came behind Q2-17s at strong double-digits. Compared to our estimates, both revenue and net profit were lower by 14% and 13% respectively. Stronger gross margin minimized the effect of still-weak volume and higher-than-expected opex, in what would have been a more disappointing quarter. We now expect 2018FY net profit will be lower by 31% vs. 2017FY (-20% previously), whilst noting possible upside from (1) continued resilient margin over H2-18 (even in the traditionally weak Q4) and (2) strong reduction of opex from the current surprisingly high level (Q2-18 figure highest since Q4-16).

▪ At 312Kts in H1-18, DANGSUGAR’s sales volume is lower by 14% vs. H1-17. The difficult Apapa traffic condition remains a challenge, but more importantly, competition from smugglers importing fortified sugar (accounting for over 60% of DANGSUGAR’s sales volume) is apparently on the rise, amidst (1) globally soft raw sugar prices (-26% Ytd and -41% in 52 weeks), (2) relatively high domestic prices (+66% compared to two years ago), and (3) stable FX. DANGSUGAR’s sales volume are typically lower during the wet season in Q3, and sales in Q418 are unlikely to beat H1 run-rate under the prevailing market conditions. Consequently, we have revised our 2018 volume estimate lower to 609Kts (previously 691Kts), representing c.-8% vs. 2017FY.

▪ At 30.3%, the gross margin achieved in Q2 is slightly above the 29.5% we estimated. We believe margin was boosted by a further reduction of per tonne sugar cost (6% q/q) and marginal increase (2% q/q) in selling price. We increase gross margin estimate for 2018 slightly higher to 27% (previously 26%), while reiterating (1) better energy mix, (2) stable exchange rate, (3) stable outlook of global raw sugar prices, and (4) positive mix from growing contribution (4% of total sales volume, from 2% previously) of high margin Savannah, as tailwinds supporting our view.

▪ Our EBITDA estimate reflects both our view on low revenue (-20% vs. 2017FY) and the increase in opex estimate to NGN8 billion (6.5% vs. 2017FY), following the surprise print in Q2. We do not see the price increase mentioned above resetting revenue in H2, given the little size (basically to support revenue in Q3), amidst possible reversal in Q4. In addition to the aforementioned, our estimate of wider net profit decline adjusts for the huge (one-off) FX gain recorded in Q4-17.

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