October 8, 2018/Cordros Update

CADBURY NIGERIA PLC (CADBURY) – HOLD

▪ The shares of CADBURY appreciated by 6.04% to NGN9.65. 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.

▪ Ahead of Q3 earnings release, we roll forward estimates and valuation to 2019E with a BUY rating (21% upside) – and expected total return of 18% after incorporating 2018E dividend yield of c.1%.

▪ From NGN460 million loss in H1-18, we expect NGN140 million net profit in 9M-18E on estimated NGN560 million profit in Q3-18E. While we expect lower revenue relative to Q2-18, earnings should gain support from relatively improved gross margin.

▪ It would be interesting to see the feedthrough to gross margin from the rising price of cocoa (17% y/y in Q3-18) and the offsetting impact of softer raw sugar prices (-22% y/y in Q3-18).

DANGOTE SUGAR REFINERY PLC (DANGSUGAR) – BUY

▪ The shares of DANGSUGAR closed higher by 2.11% to NGN14.50. DANGSUGAR trades at forward PE of 6.3x, 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).

▪ Ahead of Q3 earnings release, we roll forward estimates and valuation to 2019E and upgrade rating to BUY with 41% upside – and expected total return of 50% after incorporating 2018E dividend yield of c.9%.

▪ We expect Q3-18E net profit will be flat relative to Q2-18, but lower by c.19% vs. Q3-17, largely on lower revenue (owing to weaker sales volume and softer selling prices) and gross margin.

▪ It would be interesting to see how softer raw sugar prices (-22% y/y in Q3) have impacted gross margin (via the mix of lower unit input costs and possibly, selling prices) and volume (via increased activities of illegal importers).

FLOUR MILLS OF NIGERIA PLC – BUY

▪ The shares of FLOURMILL declined by 0.25% to NGN19.95. FLOURMILL trades at 2018 PE of 7.6x, 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. We update our model.

▪ Ahead of Q2 earnings release, we maintain BUY with 143% upside – and expected total return of 154% after incorporating 2019E dividend yield of 11%. FLOURMILL is likely to report lower profit in Q2-19E (-16% y/y on our estimate) relative to Q2-18.

▪ The slow start (-11% y/y) at the crucial first quarter (accounting for 26% of yearly sales) is instructive, and we believe conditions – increased competition, softer selling prices, generally weak demand, and Apapa traffic gridlock – have not improved.

• We are also conservative in gross margin estimate amidst rising wheat prices and softer selling prices. It would be interesting to see the feed through to gross margin from the rising price of wheat (13% y/y as at September ending) and the offsetting impact of softer raw sugar prices (-22% y/y in Q3-18).

GUINNESS NIGERIA PLC – HOLD

▪ The shares of GUINNESS fell by1.25% to NGN79.00. GUINNESS trades at 2018 PE of 19.1x, below its 5-year average of 27.7x.

▪ We update on GUINNESS following Q4-18 and 2018FY results and call with management. The 2018FY result was helped by performance in the earlier quarters, masking a very disappointing fourth quarter (EBITDA: -38% y/y and -16% q/q, EBIT: -55% y/y and -33% q/q, and net profit: -64% y/y and -45% q/q). The operating environment is expected to remain challenging, and competition intense in the near term. Management shares this view, but is confident that its strategies are yielding the desired result. We still expect EPS to grow in 2019E, but have revised estimate lower.

▪ We cut our TP lower to NGN70.91/share (previously NGN73.75/share) and maintain SELL on 22% downside, including our estimated dividend yield of c.3%. While noting that equities have broadly been bearish YtD, we attribute part of GUINNESS’ share price decline to investor reaction to the unimpressive H2-18 earnings (-31% PAT vs. H1-17). On our revised estimates, the stock is trading at forward (2018E) P/E and EV/EBITDA multiples of 21.3x and 8.0x, a discount to its five-year historical averages of 33.1x and 9.3x respectively.

▪ Management said that about 70% of the revenue growth in 2018FY was on volume, driven by accessible beer and malt, as well as mainstream spirits. We forecast 10% revenue growth in 2019E, and expect volume will gain support from the stronger commercial and RTM activities we have observed with GUINNESS, including portfolio expansion/extension and the reversal of earlier price increases.

▪ We leave our gross margin estimate for 2019E at 34%, unchanged vs. 2018FY. In our view, both the cost environment and competitor price actions offer no positive outlook for gross margin in the near term. And we see little-to-no impact on margin from volume mix, as we expect accessible brands will continue to drive most of GUINNESS’ volume performance. On competition and margin effect, it is instructive to note that even the market leader has resolved to taking the full hit of the excise tariff hike.

▪ Compared to our previous estimate, we cut EBIT margin lower by 90 bps to 9.5% (2018FY: 9.4%). We raise estimate for opex-to-revenue ratio to 25% (previously 24%), reflecting (1) the negative surprise in Q4-18 –which impacted earnings the most during the period and (2) expected higher spend on commercial activities and RTM in support of our volume outlook.

▪ The net impact of the changes to our model is a slight cut to 2019E EPS estimate to NGN4.13 (previously NGN4.71), implying 35% growth over 2018FY. Net finance cost, which we forecast to more than halve in 2019E on the assumption of nil FX losses, is a major driver of our EPS estimate.

NIGERIAN BREWERIES PLC – HOLD

▪ The shares of NB depreciated by 1.97% to NGN89.70. NB trades at forward PE of 23.1x, below its 5-year average of 31.5x.

▪ NB reported 33.1% y/y decline in Q2-18 EPS, impacted by sales and gross margin declines, as well as higher effective tax rate, which offset a significantly lower net finance cost. Both the achieved revenue and net profit trailed our estimates for the three months period by 6% and 39% respectively. And annualized, the H1-18 EPS of NGN2.31 is 8% behind consensus estimate for 2018E.

▪ We roll forward estimates and valuation to 2019E, ahead of Q3 earnings release, and maintain HOLD with 9.5% upside – and expected total return of 13.5% after incorporating 2018E dividend yield of 4%.

▪ On our estimate, NB’s net profit grew by over 800% y/y in Q3- 18E, supported by lower opex and finance charges. We estimate that revenue will likely be flat compared to Q3-17.

▪ Compared to the Q1 and Q2 this year, NB’s Q3-18 net profit is likely to be much lower (we estimate – 70% on average), reflecting the typically lower revenue and gross margin reported during the period. It would be interesting to see the feed through to gross margin from the rising prices of sorghum (44% y/y in Q3-18), maize (11% y/y in Q3-18) and barley (2% y/y in Q3-18).

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