Cadbury: Analysts Downgrade Stock to Hold after Disappointing Earnings
Equity research analysts have settled for Hold rating on Cadbury Nigeria Plc stock after disappointing earnings. The hold recommendation, a way of Chapel Hill Denham analysts telling investors that there is no substantial information that can affect share price.
The company’s unaudited first half 2020 results show that the consumer giants had a rough ride in second quarter as revenue, profit dropped big.
On the back of the disappointing earnings, Chapel Hill Denham equity analysts downgraded Cadbury share to hold, follow a cutback in price target for the year.
Equity analysts set a 12-month target price of ₦6.68 for the share of the company, though it closed at ₦7.25 on Friday.
In the last 7-trading session, Cadbury share price had stayed at ₦7.25, as against 52-week high of ₦11.65 and had bottomed at ₦4.95.
The review of the unaudited scorecards showed a loss after tax of ₦102 million in Q2-2020 compare to profit after tax (PAT) of ₦163 million in Q2-2019. In the first half (H1-2020), the company’s PAT fell by 19.9% year on year to ₦537 million,
This implies an annualised earnings per share (EPS) of ₦0.57, which was head of Chapel Hill Denham estimate of ₦0.39 for 2020. Analysts believe Cadbury’s softer results reflect the impact of economic shutdown and restrictions in Nigeria, which slowed demand for the company’s products.
“We have a HOLD rating on Cadbury with a 12-month target price of ₦6.68 as against current price of ₦7.25”, Chapel Hill Denham stated. Explaining its decision, Chapel Hill Denham revealed there some attractive sides to the performance of the consumers’ goods giants.
The investment firm observed a significant drop in cost of sales in Q2-20, which came at 24.5% year on year and 17.7% in the first half of the year respectively.
Analysts said the decline in Cadbury’s costs is a result of the impact of softer production activity in Q2-2020 as demand for products dropped.
“On a broader scale, we also believe the company benefited from lower input prices of cocoa, which slowed down by 11.4% year to date,” the firm stated. Again, the investment banking firm noted a modest decline in operating expenses (OPEX) in Q2-20 at 23.9% and 18.9% H1-20, respectively.
This was largely influenced by 30.1% decline in selling expenses to ₦887 million in Q2-20. “We note that administrative expenses increased by 2.0% to ₦306 million in Q2-20 and expect operating expenses growth to remain tighter in subsequent quarters”, analysts explained.
In addition, the company’s net operating cash flow strengthened to ₦3.18 billion in H1-20 from –₦418 million in H1-19. Analysts said they believe an improvement in working capital management supported cash flows in H1-20.
The review of the balance sheet actually showed that trade and other payables rose by 47.2% year to date to ₦14.16 billion while trade and other receivables declined by 0.8% to ₦4.50 billion.
However, inventories increased significantly by 37.0% from the beginning of the year which analysts considered a sign of slow sales.
Nonetheless, cash and cash equivalents improved 47.6% to ₦6.54 billion from the beginning of the year.
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Notably, net capital expenditure (CAPEX) dropped to ₦198 million which then resulted to lower capex intensity of 1.2% in H1-2020 compare to 2.0% in H1-2019.
This aided a rise in free cash flow to ₦3.04 billion in H1-20 from negative position totaled ₦733 million in H1-2019.
Explaining concerns about the results, Chapel Hill Denham stated that there was substantial revenue decline in both Q2-20 at 27.6% and in H1-20 respectively.
On quarter on quarter basis, top line receded by 13.9%.
“This is no surprise, as we mentioned in our sector that Cadbury will be materially impacted”, Chapel Hill Denham stated. Analysts had projected a 15.3% turnover decline in our prior forecast for financial year 2020, based on a 2-month scenario.
However, based on Cadbury’s Q2-20 results, beverage sales fell by 24.6% year on year to ₦5.01 billion, Confectionery sales dropped by 38.5% to ₦14.7 billion and intermediate cocoa by 22.4% to ₦886 million.
“We note that annualised H1-20 revenue (₦31.83 billion) is tracking about 10.2% behind our financial year 2020 estimate of ₦35.46 billion”, Chapel Hill Denham highlighted. The equity note shows that a key development include material deterioration in margins for Q2-20, but tight in H1-20.
Cadbury’s gross margin fell to 13.8% in Q2-20 from 17.4% in Q2-19, EBITDA margin declined to 3.2% in Q2-20 as against 5.8% in Q2-19. Meanwhile, profit after tax (PAT) margin reduced to -1.4% in Q2-20 compared to 1.6% in Q2-19.
“Looking at H1-20, which was influenced by Q1-20, gross margin reduced marginally to 20.8% in comparison with 21.3% in H1-2019. However, EBITDA margin improved to 9.5% in H1-20 from 8.6% in H1-19 while profit margin was unchanged at 3.4% in H1-20.
Analysts Advise Investors to neither Buy, nor Sell Cadbury Shares
