Unimpressed equity analysts have downgraded Cadbury Nigeria Plc with a sell rating having noted destructible impacts of sustained costs pressure on earnings. Some equity analysts also project that the company will deliver negative earnings in 2021 due to increased borrowings.
Ballooning operating costs have persistently clouded the consumers’ goods company’s profitability amidst rising competition. Though its products’ prices were adjusted upward in line with inflationary pressure, Cadbury Nigeria has been unable to cover its direct and indirect costs as loss-making persists.
Based on the past financials, it appears that Cadbury Nigeria is breaking value as costs overrunning revenue growth keeps dragging net asset value downward with a sustained loss per share.
In an equity report on the ticker, analysts at WSTC Securities assigned N4.12 fair value to Cadbury Nigeria, saying that the company’s share trades at a significant premium, thus advised clients to sell.
In the past few years, financial records show that the company has been cold in terms of earnings performance amidst an unfavorable operating environment exacerbated by the outbreak of the pandemic in 2020.
However, while the pandemic handed a veritable alibi for poor corporate performance, the company had been on a losing streaks as the cost profile maintained an uptrend ahead of turnover. Key operators in the segment have continued to jostling for tightened consumers’ wallets as households prorate weakened naira on competing needs.
Though the Nigerian government locked its land borders against foreign products infiltration, Cadbury Nigeria has yet been unable to reflate profitability performance due to impacts of naira devaluation and steep inflation amidst heavy rivalry.
In the second quarter of 2021, the company grew its revenue by 30% year on year to N9.60 billion from N7.36 billion in the second quarter of 2020 owing to an increase in volume sales induced by the resumption of economic activities.
The company’s performance was flattered by the low base from last year as COVID-19 trade disruptions hampered sales in 2020, Meristem Securities noted in its report.
On the other hand, analysts at WSTC Securities said a moderate price adjustment took place during the quarter, thus gave the company’s topline a lift.
Despite this, the company saw a slowdown in profit margin, meaning it could not cover its ballooning costs enough compare to the previous year.
Specifically, Cadbury Nigeria’s gross profit declined by 32% year on year to N688 million in the second quarter of 2021, compared with N1.02 billion reported a year ago.
What happened was that inflation and naira devaluation pushed its costs of sales upward by 40% in the period, compared with 30% revenue growth.
While at it, the company’s result shows operating expense also jumped significantly, up 37% to N1.63 billion in the second quarter of 2021.
As a result of the rise in operating expense, analysts said Cadbury Nigeria operating loss worsened to N933 million from a loss position of N168 million recorded in the second quarter of 2020.
Eventually, the company closed the period with a loss before tax which printed at N861 million from a loss of N146 million sustained in the second quarter of 2020.
Cadbury Nigeria recorded no tax expense in the second quarter of 2021, thus loss after tax remained N861 million, from the N102 million loss record in the second quarter of 2020.
WSTC Securities analysts said in the review that refreshment beverages drove revenue growth in the period amidst weak macroeconomic conditions with steep inflation rates, high unemployment records and devalued local currency.
Analysts’ breakdown of Cadbury’s revenue, according to product segments, revealed an increase in refreshment beverages by 30% year on year to N6.53 billion in the second quarter of 2021.
Also, the company’s confectionery sales rose by 85% year on year to N2.71 billion in the period but intermediate cocoa sales declined by 59% to N358 million.
Overall, analysts said the increased sales of refreshment beverages which constituted 68% of total revenue underpinned the growth in revenue.
“We posit the sales decline of intermediate cocoa to the inability to export to foreign customers due to border restrictions, induced by a second wave of the coronavirus pandemic the Delta variant”, WSTC analysts added.
In the report, analysts explained that the company see its higher cost margin eroding the revenue boosts reported in the second quarter of 2021, a period when Nigeria’s economy was gaining momentum.
Its financial statement for the second quarter of 2021 showed that the company’s cost margin increased by 700 basis points to 93%, thus significantly eroding topline gains.
Analysts at WSTC attribute the relatively high cost of sales to rising input costs – induced by higher commodity prices in the global market.
“We believe that difficulties in accessing foreign exchange to import raw materials impacted negatively on costs”.
As a result of the weak cost margin and Cadbury’s limited ability to raise prices amid intense industry competition, gross profit declined by 32% to N688 million.
To drive topline growth, analysts at WSTC Securities believe that the Company intensified efforts on marketing and branding, as reflected in the 55% year-on-year increase in selling and distribution expense to N1.38 billion.
“We also think that as economic activities resumed, the Company incurred marketing-related expenses that it did not incur in the second quarter of 2020 when there were movement restrictions”.
Although the Company recorded some cost savings on the administrative expenses, down 16% year on year to N257 million in the second quarter of 2021, it was not enough to offset the higher marketing expense.
Given rising cost pressures, analysts said they expect to see additional price increases in the second half of 2021, project 23% year-on-year revenue growth to N23.88 billion.
On the back of higher price realization and cost optimization efforts, analysts see the Company’s operating profit rebound to N438 million in the second half of 2021 from an operating loss of N433 million.
“However, we project a loss before tax payment due to our expectations of higher finance costs”, the team of equity analysts at WSTC added.
Cadbury Nigeria’s total borrowing, excluding leases, jumped 122% year to date to N7.65 billion. In the second quarter alone, analysts at WSTC said the company’s total borrowing expanded 54% year on year, hence, the project that finance costs would reflect in the second half numbers.
On a cumulative note, the company’s first half of 2021 revenue grew by 16.36% from N15.91 billion to N18.52 billion, an improvement fueled by growth recorded in the refreshment beverage segment.
A key development that impacted the company’s effort to reverse the loss-making streak was that revenue from the intermediate cocoa products segment.
Typically, it accounts for the lion share (75.31%) of the company’s export earnings plummeted by 68.63% year on year from N2.12 billion in the first half of 2020 to N665 million in the first half of 2021 despite the reopening of the land borders.
On this note, total export sales tumbled significantly by 79.09% year on year from N2.40 billion in the first half of 2020 to N501 million in the first half of 2021. Analysts at Meristem Securities however noted that domestic sales, however, acted as a buffer, edging upwards by 34.01% to N17.80 billion in the first half of 2021.
“We are cautiously optimistic about the firm’s performance for the rest of the year. While the gradual improvement in economic activities and the firm’s brand acceptance by consumers are major upsides, the persistent pressures on the general price level and the resultant impact on consumers’ disposable income pose threats to the outlook”.
Meristem Securities forecast a 9.87% growth in revenue to N38.89 billion for the financial year 2021 as against N35.41 billion in 2020.
In our opinion, mounting inflationary pressure, increase in production volume as well as exposure to foreign exchange volatility, had the largest impact on the movement in costs during the period.
For the first half, Cadbury Nigeria’s bottom-line slumped to a loss position of N516.18 million from an N536.66 million profit in the first half of 2020.
“Our outlook for earnings is clouded by the rising cost pressures and the resultant impact on the firm’s operating performance in the near term”, Meristem said.
Hence, analysts at the investment firm forecast a loss of N102.28 million in 2021 from a profit position of N931.83 million in 2020.