November 5, 2018/Cordros Update
CADBURY NIGERIA PLC (CADBURY) – BUY
▪ The shares of CADBURY depreciated by 5.26% to NGN9.00. CADBURY trades at a significant forward PE above its 5-year historical average of 24.9x.
▪ CADBURY published September 30 2018 result with net profit of NGN600 million in Q3. This overturned the loss of NGN420 million in H1-2018 to NGN170 million profit in 9M 2018 (9M-2017: NGN60 million loss). The NGN680 million pre-tax profit in Q3 beat the NGN560 million we estimated, and is the company’s highest since Q3-2017.
▪ Revenue performance was a positive surprise. Growth was 16% y/y and 1% q/q in Q3, and beat our estimate by 5%. Compared to Q2-18, domestic sales grew marginally while exports declined. Compared to last year (LY) however, export growth was much stronger in the Q3 (39%) and 9M (+75%) periods. Sales in the local market grew by 13% in Q3-18 vs. LY, but has grown by only 4% YtD. According to some of the distributors we spoke with, there has been fairly good demand for 3-in-1 Hot Choco thus far this year, and consumers are increasingly aware of the gums (Cloret and Trident).
▪ Gross profit margin recovered from 11% in Q2 to 26.5% in Q3– in line with the 26.1% we estimated. The local prices of the company’s beverages and candies have been largely stable YtD from our routine market checks and local sugar price is softer compared to LY (-18% YtD). Though cocoa prices are up more than 17% YtD, it appears CADBURY’s backward integration via Stanmark is limiting the impact on production cost.
▪ Net finance cost of NGN110 million was reported during the three months period. Although finance cost (NGN130 million) was higher vs. Q3-17 (124% y/y), it reduced further from Q218 , and has now fallen consistently since the peak of NGN210 million in Q4-17. The balance of overdraft facilities (the only debt in CADBURY’s balance sheet) has reduced markedly to NGN1.7 billion, from NGN1.9 billion at the beginning of the year.
▪ CADBURY’s Q3 performance was better-than-expected. Given the current result, we now look for higher 2018 earnings than we previously expected. We expect reaction to the result will be neutral. Our estimates are under review.
DANGOTE SUGAR REFINERY PLC (DANGSUGAR) – BUY
▪ The shares of DANGSUGAR closed lower by 10.96% to NGN13.00. DANGSUGAR trades at forward PE of 5.7x, lower than its 5-year historical average of 7.5x.
▪ DANGSUGAR just published 9M-18 results, with EPS down 57% y/y and 46% q/q in Q3-18. This marks the second quarter of y/y contraction in EPS, with net income as at 9M-18 consequently lower vs. 9M-17 by 36%.
▪ Q3-18 revenue was down by 26% y/y and 24% q/q, extending the trend of revenue decline (on y/y basis) to the fifth quarter in a row. Although Q3 is typically an off-peak period, continued lower turnover vs. previous years suggests that DANGSUGAR continues to struggle with competition from illegal imports (which have also forced down prices significantly – we estimate c.16% decline in price YtD), as well as the difficulty that both the company and its customers face accessing the refinery located in traffic-congested Apapa. We estimate that achieved sales volume in Q3-18 was lower relative to last year in low-single digit, but selling prices are some way lower by +12% vs. Q3-17.
▪ At 20.8% in Q3-18, gross margin was lower compared to both Q3-17 (32.9%) and Q2-18 (30.3%). With imported raw sugar prices trending lower (-29% YtD and -22% y/y in Q3-18) and exchange rate stable, we link the weak gross margin to both lower selling prices and efficiency losses from operating at much lower scale – at currently about 43% utilization, vs. 53% historical average rate.
▪ Further down the income statement, (1) investment income was lower (32% y/y and 40% q/q), (2) there was a fair value gain of NGN970 million (from losses in all quarters of H1-18 and NGN670 million gain in Q3-17), and (3) net finance charge was mixed (-49% y/y and +27% q/q).
▪ DANGSUGAR’s Q3 EPS is way-below our expectation (at 49% variance), and is unimpressive, in our view. The result adds to the disappointing July-September results that have been published thus far by the consumer goods companies in our universe (excluding NESTLE and UNILEVER). Annualized, DANGSUGAR’s 9M-18 EBITDA and EPS are below 2017FY by 26% and 43% respectively. Our estimates are under review.
FLOUR MILLS OF NIGERIA PLC – BUY
▪ The shares of FLOURMILL declined by 4.39% to NGN18.50. FLOURMILL trades at 2018 PE of 7.0x, below its 5-year average of 19x.
▪ FLOURMILL published H1-19 result with EBITDA and EPS down by 31% y/y and 78% y/y respectively in Q2. The group’s performance in the period was impacted by (1) lower revenue and gross margin, (2) higher OPEX, and (3) significantly lower other income. The aforementioned offset the high-double digit decline in net finance costs. Compared to our estimate, the Q2-19 EPS is slower by a significant margin.
▪ Over H1-19, both FLOURMILL’s EBITDA and EPS are lower by 24% and 61% respectively relative to H1-18, and are below market expectation for 2019E by 2% and 26% when annualized. • Q2-19 revenue was down by c.9% y/y and below our expectation by 1%. Trend of y/y revenue decline has now extended to the fourth quarter in row. Food (-7% y/y) and Agro-Allied (-19% y/y) revenues declined the most, while Support Services (Packaging, Ports operation, and Real Estate/others) grew by 15% y/y. In the Food category, revenue from Sugar was down 16% in H1-19 while Flour/processed food revenue declined by 7% relative to last year.
• Further down the income statement, net finance cost was down 30% y/y, marking the third quarter of y/y decline. Noteworthy, finance cost, at NGN5 billion, (1) was down 32% y/y and 19% q/q and (2) is FLOURMILL’s lowest in a quarter since the period ended March 2016. Compared to Q1-19, total borrowings are currently lower by N29.9 billion, and by NGN48 billion compared to H1-18. Expensive overdraft facilities now account for far lesser proportion of gross debt at 1% (from 12% as at Q1-19, and vs. 19% average in 2018FY).
• FLOURMILL’s Q2 EPS is unimpressive in our view. The result adds to the disappointing July-September results that have been published thus far by the consumer goods companies in our universe (excluding NESTLE and UNILEVER). Our estimates are under review.
GUINNESS NIGERIA PLC – HOLD
▪ The shares of GUINNESS declined by 5.19% to NGN73.00. GUINNESS trades at 2018 PE of 17.7x, 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 assessible 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 – BUY
▪ The shares of NB fell by 6.48% to NGN82.30. NB trades at forward PE of 21.2x, 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. Weestimate 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 feedthrough 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).
NESTLE NIGERIA PLC – SELL
▪ The shares of NESTLE depreciated by 1.45% to NGN1,360.00. NESTLE trades at 12-M PE of 22.6x below its 5-year average of 43x.
▪ NESTLE published 9M-2018 results with EPS growth of 81% y/y in Q3. The y/y EPS growth was underpinned by volume-led revenue growth, stronger gross margin, and significantly lower net finance charges, all of which offset high-double digit increase in operating expenses. On the 9M-18 EPS of NGN41.78 (+44% vs. 9M-17), the board has proposed interim dividend of NGN20.00/s, in line with our estimate.
▪ Q3-18 revenue grew by 7% y/y, but was below our estimate by 3%. Compared to Q2-18 however, revenue was almost unchanged, and surprisingly so, given that Q3 has historically being a relatively stronger quarter for NESTLE. We have observed a similar trend of weak July-September revenue performance among the consumer goods companies that have published results thus far, but specifically, NESTLE’s slower q/q revenue growth is linked to the Beverage segment where volume declined marginally. Beverage revenue declined by 1% y/y (7% q/q), from 13% y/y (5% q/q) and 17% y/y (11% q/q) respective growth in the two quarters of H1-18.
▪ Elsewhere, the Food segment maintained upward growth trend at 12% y/y and 4% q/q in Q3-18 (vs. 11% y/y and 7% y/y in Q2 and Q1 respectively). Food now accounts for 64% of revenue, from 63% in 2017FY and 61% historical average. Seasoning continues to drive Food revenue, with Maggi Naija Pot increasingly gaining popularity across middle income households. Renewed demand for Golden Morn was also supportive of Food revenue in review quarter, after a challenging H1.
▪ OPEX grew 19% y/y in Q3-18, with the ratio-to-revenue coming in at 19.7%, the highest since Q4-17. The increase in OPEX was however offset by revenue growth and much stronger gross margin, resulting in EBITDA growing by c.30% y/y. For the first time this year, no impairment loss was recorded. NESTLE recorded net finance cost of NGN991 million (from NGN600 million net finance income in Q2-18) in Q3-18 – albeit lower by 84% y/y – with net FX loss of NGN50 million (-99% y/y) and 51% y/y decline in interest income.
▪ Compared to Q2-18, EPS was down 9%, driven by higher OPEX (9.7%) and the net FX loss of NGN50 million (vs. NGN590 million net gain in Q2-18). Effective tax rate in the quarter was 28%, from c.30% and c.37% respectively in Q2 and Q1.
▪ NESTLE’s Q3 EPS is near our expectation (at 3% variance), and is impressive, in our view. The result stands out among all the FMCG companies’ results (both 9Ms and Q3) we have seen thus far. Annualized, NESTLE’s 9M-18 EPS and EBITDA are above 2017FY (31% and 26% respectively) and 2018 consensus estimates (0.1% and c.15% respectively). We expect positive reaction to follow. Our estimates are under review.
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