Revenue falters in Q1-20 but earnings remain resilient
Cadbury Nigeria Plc (Cadbury) has published its unaudited Q1-20 results, which showed a decline in revenue by 7.9% yoy to N8.55bn. However, the company recorded lower cost of sales and operating expenses in Q1-20, which supported the EPS growth of 26.1% yoy to N0.34.
What we like about the results
Cost of sales and operating expenses fell by 9.3% yoy and 13.1% yoy respectively in Q1-20.
We link the decline in costs of sales to the lower input price of cocoa (down 6.1% YTD), on the back of weaker global demand. At the same time, the company recorded a 9.1% yoy and 24.4% yoy decline in selling & distribution and administrative expenses respectively, which supported the fall in operating expenses.
Cadbury’s net operating cash flow (NOCF) turned positive in Q1-20 at N272mn (from –N281mn in Q1-19).
The improvement in NOCF was largely supported by the 22.8% YTD increase in trade and other payables to N11.81bn (from N9.62bn in FY-19), despite the 37.2% YTD and 17.3% YTD increases in inventory and trade & other receivables respectively to N8.32bn (from N6.06bn) and N5.32bn (from N4.53bn). This suggests that Cadbury largely benefited from favourable credit terms from suppliers in the quarter, but struggled to sell much of its products.
Deleveraged balance sheet still positive
. Cadbury’s balance sheet remains deleveraged with zero debt and consequently nil finance costs. This supported the company’s PBT, which advanced by 26.1% yoy to N913mn (pre-tax margin of 10.7% from 7.8% in Q1-19) while PAT equally rose by 26.1% yoy to N639mn (net margin of 7.5% from 5.5% in Q1-19).
Our concerns about the results
Revenue fell by 7.9% yoy to N8.56bn in Q1-20.
The decline in turnover was due to
lower beverage sales (historically accounts for 58% of total revenue), which fell by 20.8% yoy in Q1-20. Nonetheless, the revenue of other business segments expanded in Q1-20, with confectionary sales increasing by 4.3% yoy to N2.83bn and intermediate cocoa sales rising by 36.5% yoy to N1.24bn. We believe the decline in beverage sales in Q1-20 is indicative of lower market share as the segment has delivered year-on-year improvements over the past three years.
Valuation
We have a
HOLD
rating on Cadbury, with a target price of N6.68. Cadbury currently trades at FY-20E EV/EBITDA of 4.8x, which is at a 76.0% and 15.1% discounts to EMs and global peers respectively.
