Stock Valuation: WSTC estimates show CADBURY’s share price trades at premium

Cadbury Nigeria Plc reported slower demand as sales declined 8% in the first quarter (Q1) 2020 to ₦8.55 billion from ₦9.28 billion in Q1 2019.

WSTC Securities Limited revealed in its equity analysts note that Cadbury with stock ticker CADBURY is trading at premium.

Meanwhile, Cadbury’s market capitalisation closed the week at ₦13.992 billion on 1,878,202,040 shares outstanding.

On Friday, the company share price moved up by 8% from ₦6.90 to ₦7.45 as stock market sentiment improved sheepishly.

Data from the Nigerian Stock Exchange shows that the company share 52-week high was ₦12.50. It had bottomed at ₦4.95 in the last 52-week.

Thus, WSTC revised earnings per share slightly from ₦0.72 to ₦0.75, resulting from expectations of a lower cost of sales in subsequent periods of the year.

Analysts explained that the weaker sales majorly resulted from a 21% decline in revenue from its refreshment beverages business segment.

Demand for Cadbury’s refreshment beverages dropped from ₦5.67 billion in Q1 2019 to ₦4.49 billion in Q1 2020.

The refreshment beverages segment includes the manufacturing and sale of Bournvita and 3-i₦1 Hot Chocolate.

Analysts at WSTC Securities attribute the sales decline in the segment to the impact of waning demand, amid heightened competition in the market.

Notably, analysts pointed to activities of major competitors like Nestle, Promasidor, and Novartis.

“We particularly posit higher pressures in its 3-in-1 Hot Chocolate product”, analysts emphasised.

The confectionery business segment grew by 4% from ₦2.71 billion in Q1 2019 to ₦2.83 billion; while the intermediate cocoa products grew by 37% from ₦904.56 million to ₦1.24 billion.

Beyond the revenue decline, analysts said they noted the 37% spike in inventory levels from ₦6.06 billion as of financial year 2019 to ₦8.32 billion in Q1 2020.

This is in addition to a 17% rise in trade and other receivables from ₦4.53 billion as of FY 2019 to ₦5.32 billion as of Q1 2020.

“In our view, we think that the higher inventory levels possibly resulted from increased purchases towards the end of the quarter, to take advantage of the declining prices of cocoa in the global market”, WSTC explained.

In the recent time, the decline in global demand, as well as global supply, resulted in a decline in global cocoa prices.

According to data from the International Cocoa Organisation, cocoa prices fell by 14% from 2,720 per ton in February 2020 to 2,340 per ton in March 2020.

WSTC noted that the 23% increase in trade payables provided the Cadbury some level of comfort to also increase credit sales to customers, without a significant impact on cash position.

The unaudited statement shows that cash flows from operations was positive at ₦271.73 million in Q1 2020 compared to a negative operating cash position of ₦280.84 million in Q1 2019.

Cost margin decreased marginally by a 100-basis point to 73% compare to 74% in Q1 2019.

This resulting from a 9% decline in cost of sales from ₦6.91 billion in Q1 2019 to ₦6.26 billion in Q1 2020.

Analysts linked the lower costs incurred to lower volumes of goods sold during the period.

Nonetheless, gross profit declined by 4% year-on-year, from ₦2.38 billion in Q1 2019 to ₦2.29 billion

Operating Efficiency

Despite the topline pressures, operating profit grew by 24%, from ₦713.65 million in Q1 2019 to ₦882.45 million in Q1 2020.

Analysts explained that the higher growth in operating profit was driven by a 13% decline in operating expenses, from ₦1.71 billion to ₦1.48 billion.

As a result, operating expense margin lowered from 18% to 17% year on year.

Further to the 100% decline in finance costs from ₦26.33 million to zero in Q1 2020, profit before tax grew by 26% from ₦723.93 million in Q1 2019 to ₦912.77 million in Q1 2020.

This was the case despite a 17% decline in finance income from ₦36.61 million to ₦30.31 million.

The Company’s effective tax rate remained flat at 30%, thus, profit after tax also advanced by 26% year-on-year, from ₦506.75 million in Q1 2019 to ₦639.93 million in Q1 2020.


We revise our EPS slightly from ₦0.72 to ₦0.75, resulting from our expectations of a lower cost of sales in subsequent periods of the year.

Although we expect that revenue growth will remain under pressure, owing to weak demand and increased competition.

We believe that further improvements in cost margin and operating expenses will provide some accretion to the bottom-line.

In the near to mid-term, we see limited growth prospect for the Company, owing to the overall weak macro fundamentals.

We estimate a return on equity of 10% for the Company, which stands above its 5-year average return on equity of 5%.

Although we note the improvement in return on equity, it does not cover the estimated cost of equity of 21%.

In addition, the stock’s earnings yield stands at 11%, below inflation rate of 12%.

Analysts at WSTC forecast a dividend of ₦0.50 for 2020 compare to ₦0.49, which implies a dividend yield of 7%.

“Our fair value estimate of the stock is ₦2.69 as against ₦3.23 previously estimated

“The downgrade resulted from changes in the equity risk premium of the stock, which reflects the underlying risks associated with the Nigerian equity markets, given the current fundamentals.

“At current market price of ₦6.90, the stock trades 61% premium to our fair value estimate”, analysts at WSTC Securities Limited stated.

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Stock Valuation: WSTC estimates show CADBURY’s share price trades at premium

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