Cadbury delivers solid performance after restructuring as EPS hits 5-Year high

Cadbury Nigeria Plc delivered strong performance after the company’s restructuring exercise, though earnings remain behind pre-2014 average performance.

The company rebounded with a solid performance as against analysts’ consensus estimate, bolstered key performance indicators.

Its earnings per share (EPS) hit 5-year high as Cadbury reduce finance cost to zero.

The result shows that Cadbury earned 67 kobo on 1,878,202,040 shares outstanding, though stock market performance yet remains flattish.

Analysts said earnings information failed to lift share price due to weak sentiment as investors valued the company at N16.903 billion.

Market observers think the company would compete better, stronger with increase products portfolio.

Sentiment remains low

It will take time for Cadbury to convince investors it has regained competitive strength. Obviously, the improve performance was aided by border closure.

Foreign goods products with high comparative cost advantage have been wade off-market with border closure.

“As long as border remains closed, fast moving consumers goods segment would do well”, Consultants at LSintelligence said in an email.

However, it appears that the upbeat has failed to resonate with the market, stock remains flattish, and then came down 70 kobo to N9.

Still, signs of pressures were evident when compared to the corresponding period of the previous year, a strong in the first half of 2019 result was able to cover for the weaknesses in the latter part of the year.

Efficient Route to market

The company’s earnings rebound in fourth quarter as revenue grew by 16% year-on-year in Q4’19 to N10.41 billion from N9.01 billion in Q4’18.

Analysts at WSTC Securities believe that the revenue growth was a manifestation of an improved sales force productivity, and efficient route to market.

They also think that there were price increases during the period. Revenue grew by 13% in Q1’19 and by 9% in Q2’19.

“A weak revenue growth in Q3’19 raised questions on the sustainability of the double-digit growth, and we had expected a weaker revenue growth in Q4’19”, analysts held.

However, revenue performance surprised in Q4’19. Cost margin stood at 77% in Q4’19, relative to 82% in Q3’19.

Analysts said owing to increased competition in the market, Cadbury was unable to pass the increased cost of production to consumers in Q3’19.

However, resulting from the squeeze in margins the company made a loss of N21.91 million in Q3’19 as against N595.72 million profit in Q3’18.

Analysts at WSTC also think that the favourable economic policy (land border closure) possibly made it relatively easy to raise prices in Q4’19.

Financial year 2019 Performance

On a full year basis, revenue increased by 9% year-on-year to N39.33 billion in financial year 2019 (FY’19) from N35.97 billion in comparable period in 2018 (FY’18).

This 9% revenue growth was led by a 20% revenue growth in the confectionary segment where revenue surged to N11.49bn from N9.54bn in FY’18.

“In our view, we think that the solid growth recorded in the confectionary business was owing to a combination of improved branding and a possible price increase during the period”, analysts at WSTC Securities held.

Thus, the segment which contributes the highest to revenue, the refreshment beverages segment, grew by 8% year-on-year from N21.39bn in FY’18 to N23.15bn in FY’19.

Analysts review reckoned that revenue from the refreshment beverages initially grew by 19% in H1’19. However, in H2’19, revenue from the business segment declined by 2%.

WSTC’s analysts attribute the decline to the possible impact of the border closure in August 2019. Meanwhile, cost of sales also jerked up by 11% from N28.02bn in FY’18 to N31.11bn.

The increase in cost of sales relative to revenue was majorly due to higher cocoa prices in the global market.

Analysts said although the company processes the cocoa that it uses for production, we believe that it still imports cocoa beans.

Based on the figures analysed on the financial statements, analysts believe that the company did not pass the increased costs to consumers. Thus, cost margin rose to 79% in FY’19 from 78% in FY’18.

Resulting from an 11% increase in operating expenses, operating profit declined by 20% year-on-year from N1.69bn in FY’18 to N1.36bn in FY’19.

However, the game changer to the bottom line was the 100% decline in finance cost to zero from N592.23mn incurred in FY’18.

Profit before tax then grew by 26% year-on-year to N1.54bn from N1.22bn from the comparable period in 2018.

The combination of savings from finance cost and a higher finance income provided accretion to the bottom-line.

This helped down the line as profit after tax grew by 59% year-on-year from N823.09mn in FY’18 to N1.27bn.

Analysts at WSTC Securities think that the Company will pay at least N0.25 dividend by the time it declares its audited results.

“We see the story of Cadbury as a positive one over the last five years. However, we believe that the return on investment is not commensurate with the cost of capital”, analysts held.

WSTC stated that between FY’14 to FY’19, revenue grew by a CAGR of 5%, while cost margin also increased over the period.

The notable cost margin increase was seen in FY’16 when the exchange rate was devalued.

WSTC highlighted that the economy is seen not to have recovered yet, as consumer’s purchasing power remains weak due to high inflation.

The lower purchasing power, coupled with the spike in the unemployment rate and lower income for households, resulted in a scramble for market share among the consumer goods players.

Apparently, operating in a high-cost business environment along with dealing with price-sensitive consumers has resulted in many consumer goods companies hemorrhaging margins.

In the light of the obvious challenges, Cadbury Nigeria Plc saw the need to improve and restructure.

“In our opinion, we think that an internal restructuring was done, with efficiency at the core of operations.

“From our analysis, we realised that while cost margins kept rising, the administrative expenses, selling and distribution expenses declined over the last 5 years”, WSTC note reveals.

Following the loss after tax of N296.04mn reported in FY’16, on the back of restructuring and efficiency, the Company recorded steady growth to N1.27bn in FY’19, the highest since FY’14.

The improvement in operating performance is also evidenced in the strong operating cash flows of N4.06bn in FY’19, relative to N2.96bn cash generated in FY’18.

The improvements in the figures over the years underpin our postulation that the restructuring and internal improvements of the firm yielded results.

Nonetheless, we think that the Company would need to consolidate its efforts and do more.

Cadbury earnings per share (EPS) for 2019 was  N0.67, although the highest in the last five years, still lags behind its pre-2014 average levels of N1.14.

Also, the return on equity of 9.69% in FY’19 is not just below its estimated cost of equity of c.20% – 22%, it is also below its pre2014 levels of 17%.

WSTC analysts believe that to be able to deliver value to shareholders in the form of higher returns on investment, the Company might need to expand its products portfolio and probably expand aggressively.

Cadbury delivers solid performance after restructuring as EPS hits 5-Year high By Olu Anisere