September 10, 2018/Cordros Update

CADBURY NIGERIA PLC (CADBURY) – HOLD

▪ The shares of CADBURY closed flat at 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 1.59% to NGN16.00. DANGSUGAR trades at forward PE of 7.0x, 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.

• We revise target price lower to NGN16.27 (previously NGN17.42). On our estimates, the stock is trading at forward (2018E) P/E and EBITDA multiples of 7.43x and 4.03x respectively, almost in line with its five-year historical averages, but below the Middle East peer averages of 13.2x and 8.6x respectively.

FLOUR MILLS OF NIGERIA PLC – BUY

▪ The shares of FLOURMILL dropped by 11.52 % to N21.50. FLOURMILL trades at 2018 PE of 8.2x, below its 5-year average of 19x.

▪ FLOURMILL released Q1-19 result and held conference call with analysts. The three months period (April-June) is typically strong for the company, so the reported PBT of NGN5.21 billion, from a loss of NGN2.96 billion in the January-March period, came as no surprise. But compared to Q1-18, the result showed weak performance across all lines, save for the stronger gross margin and relatively lower finance costs. Weupdate our model.

▪ Sales picked from the seasonally weak January-March period, with revenue growing 16% q/q. However, compared with the same period last year, the lower revenue (11% y/y) reported in the reference period suggests that volumes dipped. From sales perspective, the first quarter is a crucial season for FLOURMILL (accounts for an average of 26% of yearly sales). Hence, we view this relatively slow start as likely having implication for 2019E, wherein, we now forecast revenue to contract by 2%.

▪ We are concerned about a persistent weak Foods revenue (accounting for c.80% of group revenue), amidst tight sugar, noodles, and pasta volumes. Volume growth prospect is equally low for Packaging and Agro-allied, given the strength of competition in each of the segments. Management confirmed that Agro-allied and Packaging volumes were affected by competition in the review period, and that the prices of pasta, noodles, and sugar were reduced to support volume in the Food segment.

▪ From 13.8% previously, we have cut our gross margin estimate for 2019E to 12.7%, the level FLOURMILL’s management appears comfortable with – in our view. Gross margin increased q/q to c.13% in the quarter under review, but as observed for the past two years, we expect it to moderate to our target rate by the end of the year. In the near term, gross margin is expected to gain support from the improved FX and energy conditions, as well as softer raw sugar prices, but we should also note the offsetting impact of rising wheat prices, combined with the act of management passing the benefit of lower sugar prices to consumers for market share gain.

▪ On balance, we forecast both 2019E EBIT and PAT to contract by 12% and 21% respectively vs. 2018FY. Our model produced a TP of NGN33.29 (previously NGN30.56) for FLOURMILL, even as we cut risk-free rate to 13.6% (from 14.1%) and reduce capex estimate by 8% average.

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