Cadbury Nigeria – Lockdown Easing Drive Q3’2020 Earnings Recovery

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Cadbury Nigeria Plc, in its recently released Q3’2020 financial results, declared a revenue growth, after two consecutive quarters of revenue decline of 28% year-on-year (YoY) and 8% YoY in Q2’2020 and Q1’2020, respectively.

In Q3’2020, revenue grew by 4% YoY from N9.46bn in Q3’2019 to N9.88bn in Q3’2020.

Cadbury Nigeria’s operating profit stood at N420.40mn, compared to an operating loss of N76.84mn in Q3’2019.

Profit before tax significantly rose from a loss of N31.30mn in Q3’2019 to a profit of N453.89mn in Q3’2020.

In a similar trend, Cadbury Nigeria’s profit after tax improved from a loss of N21.91mn to a profit of N317.72mn.

Positive Surprise in Topline Growth:

The actual revenue growth of 4% in Q3’2020 came at a positive surprise relative to our estimated revenue decline of 15% YoY.

We had expected to see a slower recovery in topline growth even though we anticipated a gradual reopening of the economy.

In our view, we posit that increased market penetration and stronger-than-expected market demand propelled the revenue growth in Q3’2020.

Low Input Prices Drive Cost optimisation:
Cadbury Nigeria’s cost margin improved by 200 basis points from 82% in Q3’2019 to 80% in Q3’2020. We expected to see an 89% cost margin, driven by our expected steeper revenue decline.

Based on our perspective, we attribute the improvement in cost margin, despite the impact of an exchange rate devaluation, to lower raw input prices.

Although data from International Cocoa Organisation (ICCO) revealed that cocoa prices were flat in Q3’2020 at an average of $2,303 per tonne, we believe that the Group benefitted from lower prices in previous quarters, thus the weighted average cost of inventory possibly resulted in the lower cost margin in Q3’2020.

As a result of a lower cost margin in Q3’2020, Cadbury Nigeria’s gross profit grew by 15% YoY from N1.72bn in Q3’2019 to N1.97bn in Q3’2020.

Improved Operating Efficiency Further Accretive to Bottomline:

Operating expense declined by 14% YoY from N1.80bn in Q3’2019 to N1.56bn in Q3’2020, driven by a 46% YoY decline in administrative expense from N540.31mn in Q3’2019 to N290.08mn in Q3’2020.

Furthermore, selling and distribution expense was relatively managed, as it grew by just 1% YoY from N1.26bn in Q3’2019 to N1.27bn in Q3’2020.

Therefore, the cost savings in Q3’2020, in combination with a 15% YoY growth in operating income, resulted in a 647% YoY growth in operating profit to N420.40mn.

Effectively, the Group generated more income at a relatively lower cost, thus underpinning an operating efficiency during the period.

Given a zero finance cost and despite a 26% YoY decline in finance income from N45.54mn to N33.49mn, profit before tax grew by 1,550% to N453.89mn in Q3’2020.

Financial Performance Summary

Outlook
We revised our earnings expectation to reflect an improved outlook, majorly on the back of an economic reopening.

We also expect to see higher levels of demand associated with end-of-year consumption activities. We expect to see a sustained relatively lower raw input price in Q4’2020.

In the long-term, we believe that increased demand (driven by an improved route-to-market strategy) and cost optimisation will drive topline and bottom-line growth.

Valuation
Using a blend of Discounted Cash Flow (DCF), Dividend Discount Model (DDM), Residual Income Model (RIM), and EV/EBITDA valuation methodologies, we arrived at a fair value of N7.04 for the stock.

At current market price, we believe that the stock offers a total return of -11% (price return: -18%: dividend yield: 6%). Hence, we recommend a SELL.

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