August 30, 2023/CSL Research

In its H1 2023 earnings release, Cadbury’s Revenue grew by 27.7% y/y to N35.61bn from N27.88bn in H1 2022. Cost of sales also rose by 15.2% y/y from N22.03bn in H1 2022 to N25.38bn in H1 2023. The company’s profit was eroded by the jump in its Net Finance Cost to N20.61bn in H1 2023 (from a gain of N497m in H1 2022) leading to a Loss After Tax of N14.54bn in H1 2023 compared with a profit of N2.34bn in H1 2022.  The significant growth in Net Finance Cost was due to high FX losses reported in H1 2023.

Cadbury still holds a significant market share in the food production industry, being the alternative product to other high-end products in the market. Despite the temporary discontinuation of the Bournvita biscuit, we expect other consumer products such as its beverage and the reintroduction of a cheaper packaged Bournvita biscuit would boost the company’s revenue generation in the future. Therefore, we have a BUY recommendation on the stock with a fair value of N16.78/share.

The growth in revenue from the Refreshment Beverage, Confectionary, Biscuits and Intermediate Cocoa products to N24.91bn (+24.1% y/y), N8.55bn (+18.9% y/y), N798mn (+100.00% y/y) and N1.35bn (+119.4% y/y) respectively supported topline performance in H1 2023, resulting in a 27.7% y/y growth.

Revenue to N35.61bn in H1 2023 from N27.88bn in H1 2022. Domestic sales contributed the most to Revenue (98%) while export sales came in at N714.49m in H1 2023 contributing only 2.0% to total revenue.

The company’s cost of sale also rose by 15.2% y/y from N22.03bn in H1 2022 to N25.38bn in H1 2023. Consequently, the company’s gross profit grew to N10.23bn (+7.47% y/y) from N5.85bn in H1 2022. Effectively, the company’s Gross margin advanced by 8.4ppts to 30.3% in H1 2023 from 21.9% in H1 2022. 

The Total Operating Expense grew by 37.4% y/y to N4.16bn in H1 2023, driven mainly by the exponential rise in the company’s selling and distribution expenses to N3.36bn in H1 2023 from N2.44bn in H1 2022 while administrative expenses also rose to N804bn in H1 2023 from N589bn in H1 2022. Overall, the company’s EBITDA settled at N6.85bn in H1 2023 from N3.18bn in H1 2022 inclusive of the growth of 120.9% y/y in Depreciation and Amortization to N780m in H1 2023 from N353m in H1 2022.  Consequently, EBITDA margin rose to 19.2% in H1 2023 from 11.4% in H1 2022.

The company’s Net Finance Income surged to N1.14bn in H1 2023 from N376m in H1 2022 but was unable to cushion the impact of the exponential rise in its finance cost to N21.75bn from N97m in H1 2022. Consequently, the company reported Net Finance Cost of N20.61bn in H1 2023 from an income of N497m in H1 2022. The technical devaluation of the Naira resulted in an exchange difference which amounted to a loss of N21.32bn. These abrupt changes in FX policies eroded the company’s profit resulting in a loss of N14.54bn.

Outlook  

A major concern for the company is the mounting FX pressure. The demand for FX for the purchase of raw materials cannot be satisfied with only the Importer and Exporter (I&E) window with its illiquidity. The company may have to source FX funds from the parallel market at a higher price and may be forced to push the high cost of production on to the end user. In our view, an increase in price will likely not hurt the company’s topline performance because compared to its peers in the market, Cadbury offers relatively cheaper in price version of competitor products. The company has carved out a huge market share for its products and has maintained its unwavering brand quality all through the various crises witnessed in the nation’s macroeconomic space. In view of all of this, we do not foresee significant growth in its bottom-line performance.

Valuation

We have a Buy recommendation on Cadbury with a target price of N16.78/share, implying an upside potential of 21.59% from the closing price of N13.80/share as at 28-August-2023. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40.