Cadbury Nigeria Plc Stock Valuation


Ticker:                        CADBURYNature of Business:              Food Products-DiversifiedLocation :                          Nigeria
Recent Price:         NGN9.0052-Week High/Low: NGN11.00/6.60Estimated Fair Value:  NGN10.03-NGN12.81
Expected Return:  32.6%Consider Buy:                       Below NGN11.42Business Risk:            Average
Financial Risk:      AverageEconomic Moat:                  AverageCorporate Governance: Strong

Company Overview
Cadbury Nigeria Plc (CADBURY) was incorporated on 9th January 1965. CADBURY was quoted on the Nigerian Stock Exchange in 1976. It produces beverages, confectionery and intermediate cocoa products.  Its intermediate products, which are exported, include cocoa butter, cake and liquor. Cadbury Schweppes Overseas Limited United Kingdom (CSOL) is the major shareholder of CADBURY. The ultimate parent company of CADBURY is Mondelēz International (formerly Kraft Foods Inc) which controls CSOL. Mondelēz International markets snacks, beverages, chocolate, gum, candy, biscuits and cookies in more than a hundred countries.

Mr. Adedotun Sulaiman replaced Mr. Atedo Peterside who resigned as board chairman on 30th June 2020. Mrs. Oyeyimika Adeboye doubles as the managing director of CADBURY and the cluster director of Mondelēz International West Africa. Mrs. Kofo Akinkugbe and Ms. Nadia Mohammed joined the board on 1st January 2021. Mr. Gawad Abaza (Egyptian), a non-executive director, resigned in April 2020.  Another non-executive director, Mr. Nigel Parsons (British),  stepped down on 28th February 2021.

Investment Thesis
CADBURY is one of the foremost makers of fast-moving consumer goods in Nigeria.  The company has a solid distribution network and well-known brands such as Bournvita, Cadbury 3-in-1 hot chocolate, Tom Tom, Buttermint and Clorets gum. Beverages have brought in 58.9% of total revenue and 58% of Profit Before Tax (PBT) in the past eight years. Confectionery has produced 30.7% of revenue and 31.3% of PBT while intermediate cocoa products are responsible for 11.4% of turnover and 10.7% of PBT.

Being a subsidiary of Mondelēz International, CADBURY benefits from world-class research that is capable of broadening its product portfolio and enhancing the quality of its products.  

High operating cost is the bane of the company. Total cost averages out to 94.4% of turnover. Consequently, profit margins have been low. The operating profit margin hovers around 5.9% while the net profit margin is roughly 5.5%. However, the company has been turning over its stock relatively fast, i.e. stock is sold as quickly as possible and it does not have to tie down capital in stock held in its warehouse. Stock was sold or replaced 5.2 times in the year 2020; though it was less than its average inventory turnover of 7.4 times, it was comparatively high.  Stock stayed in CADBURY’s warehouse in the 2020 fiscal year for nearly 70 days. This was not bad considering the COVID-19 restrictions that were in place during the year.

Shareholders are rewarded with dividends by CADBURY. Dividend payment was interrupted only twice in the past ten years. The dividend yield of 2% in the 2020 fiscal year was close to the average dividend yield of 2.1%. Profit has been made consistently over the past decade except in 2016 when the Loss After Tax was NGN296.4 million. Capital spending has not weighed down the company as it still generates free cash flow for the greater part of the past decade. Capital spending per share averaged NGN0.74 while free cash flow per share stood at NGN0.69. CADBURY is a cash-rich company; cash per share generated by the company is approximately NGN3.33.

A share of CADBURY should trade at a price between NGN10.03 and NGN12.81, based on our valuation of the company. We, therefore, advise investors to buy below NGN11.42. The anticipated return on the stock is 32.6%.

Financial Overview
CADBURY’s total sales amounted to NGN35.4 billion in the year 2020 compared to NGN39.3 billion posted a year earlier. In other words, the results for the 2020 financial year showed that total revenue decreased by 10% as against the preceding year when it rose by 9.3%.  Nigeria was responsible for NGN2.2 billion or 54.9% of the fall in total sales revenue. Sales in Nigeria were NGN32.3 billion, 6.2% worse than the sales of the previous year, 2019. Similarly, export sales fell by 36.2% from NGN4.9 billion to NGN3.1 billion. The export market generated 8.8% of total sales in the 2020 fiscal year compared to 12.4% of the year before it.

CADBURY has been finding it difficult to consistently grow its profits. It declared an operating profit of NGN281.8 million, 79.2% lower than the previous year’s figure of NGN1.4 billion. This meant that operating profit shed 26.6% on a 3-Year Compound Annual Growth Rate basis. PBT lost 73.5% year-over-year while Profit After Tax (PAT) shrank by 13% in one year.

Refreshment beverages brought in sales revenue of NGN21.6 billion or 61% of total revenue in the year 2020. But PBT from beverages was just NGN248.9 million or 1.2% of revenue. Confectionery produced revenue of NGN11 billion and a PBT margin of 1.2%.  Intermediate cocoa products were responsible for 8% of both turnover and PBT.

The cost of sales to turnover ratio rose from 77.9% in 2018 to 83.3% in 2020. Gross profit margin, as a result, shed 5.5% within the same period. Operating profit margin stood at 0.8% compared to 3.4% of the preceding financial year. The finance income of NGN127.4 million was the reason for a PBT of NGN408.1 million and a PBT margin of 1.2%.  A tax credit of NGN523.8 million resulted in a PAT of NGN931.8 million and a PAT margin of 2.6%.

Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA), which has been on a decline, stood at NGN1.9 billion down from NGN2.9 billion achieved a year earlier. This translated into an EBITDA margin of 5.4% compared to 7.5% in 2019. In addition, the EBITDA margin trailed the 10-year average by 5.4 percentage points.

Most of its interest-bearing debt is short-term in nature. Short-term debt stood at NGN3.5 billion as at 31st December 2020. The debt to equity ratio was 25.5%, up from 0.1%; debt formed 10.4% of total assets compared with less than 0.1% of the previous financial year. Operating profit and operating cash flow covered finance cost 234.7 times and 3,542.7 times respectively at the 2020 year-end.  Cash and cash equivalents increased to NGN11.1 billion in 2020 from NGN4.4 billion in 2019. CADBURY’s net cash was NGN7.7 billion (2019:NGN4.4 billion). We are of the opinion that CADBURY is not bogged down with debt and we do not foresee any solvency problem.

Business Risk
CADBURY is prone to exchange rate volatility which can adversely affect its net earnings. It derives about 11% of its sales revenue from countries outside Nigeria. Raw material and components purchases are some of the other transactions that involve foreign exchange risk. In addition, huge costs remain a threat to the profitability of CADBURY.

Recommendation: Buy

Earnings Chart of Cadbury Nigeria plc

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