*YtD return reverses to full recovery

By Emeka Anaeto, Economy Editor

INVESTORS’ discomfort with the bad second quarter ended 30, 2016, results of Cadbury Nigeria Plc appeared to have reversed fully, apparently in wait for expected resurgence in the global brand’s known performance streak.

Just before the Q2’16 figures were presented on the floor of the Nigerian Stock Exchange, NSE, the company’s share price at N16.10, showed a year-to-date, YtD, in significant negative return of -6.12 per cent.

With the announcement of the results the initial investors’ reaction came adverse and sharp sending the stock to year’s all time low with YtD skyrocketing to -12.54 per cent. However, the stock quickly bottomed-out and began a recovery a week afterwards.

The stock had a similar trend earlier in the year when it recovered from the YtD low in January to accumulate 45 per cent gain at the end of June, supported by some optimism following Q1’16 results.

Though the YtD is still in the negative territory at -3.85 per cent as at last weekend, the quick reversal presented an internal resilience in market sentiment.

Internal resilience

But some investment analysts see this resurgence as merely speculative as the second half, 2016 horizon still appear hazy in both sales and margins.

Cadbury’s Q2’16 loss caused its first half, H1’16, profits to drop by a humongous 78 per cent from Q1’16 level.

The loss after tax in Q2’16 resulted from a combination of massive cost pressures, which compressed gross margins by over 800 basis points year-on-year and quarter-on-quarter, as well as a huge decline in revenue, driven by lower sales volume.

H2’16 prospects: Analysts believe that over second half, 2016, despite the likelihood for sustained pressure on costs, Cadbury’s management is faced with a dilemma of choosing between reclaiming market share and improving margins.  Any way it goes, there is a prize to pay, but probably, a better bargain for the bottom-line.

Already, prices had been increased about three times in the first half and similar increases effected by key competitor, Nestle, could compel more consumers to migrate further to cheaper competitors.

Besides, industry observers believe that since Cadbury has far lesser exposure to foreign exchange pressure compared to Nestle, the company would be in a less desperate situation to ramp up margins in the nearer term.

Perhaps, these permutations gave some discerning investors the speculative leverage on the bullish trade, as analysts believe that overall, the outlook for revenue is positive.

Also, a combination of expected flat prices and consequent gain in market share, alongside in-roads from the ongoing aggressive promotion of new/relaunched products, and the impact of seasonality, indicate recovery through volumes in the second half.

But the prize to pay for this possible recovery is clear.

Compared to the first quarter, operating expenses, OPEX, rose by 26.8 per cent. The market share drive with ongoing sales promotions in some cities across the country, is building costs, pointing to higher OPEX and, possibly, lower margin in H2’16.

History of revenue decline

Historically, one of Cadbury’s biggest challenges is its dwindling revenues. Revenue decline continued this quarter due to a combination of competition for its major products as well as the widespread reduction in consumer spending.

But the decline had pre-dated Nigeria’s macroeconomic headwind. The headwind became more pronounced in the second half of 2015. As far back as 2014, Cadbury had started recording declines in topline.

The company’s revenue of about N27.8 billion in full year 2015 was lower than 2014 level of N30.5 billion. Then, the 2014 figure was equally much lower than its 2013 high of N35.7 billion.

Perhaps Q1’16 revenue represented a flash in the pan as the 5.9% uptick to N7.1 billion was fully reversed in Q2’16 record of -8.2% decline year-on-year or -4.6% quarter-on-quarter.

Pressured profit margin
The bottom-line underlined by losses reflected pressured margins which contracted by -828 basis points year-on-year, to 24.6 per cent despite 269.5 per cent year-on-year rise in other income.

In the 2015 full year results Cadbury restated its 2014 income statement resulting in a profit of N2.1 billion compared to the N1.5 billion it reported in the year before.

The company said it had to restate profits due to a change in its management and technical fees for the period 2013-2015 following the approval of the rates by the National Office for Technology Acquisition, NOTAP.

The approval which, according to the company, was retroactive meant that they had to write back an overpaid fees to profits, resulting in savings of about N453.3 million and N465.2 in Royalty & Technical Fees and Management Fees respectively.

Analysts believe whilst this will not result in any cash refund, Cadbury Nigeria would reduce its payable of about N918.5 million which would have been paid to its parent companies, Cadbury UK and Mondelez (owners of Cadbury UK).

NOTAP approved a technology fee of 0.5% of Net Sales not exceeding N436 million to be paid to Cadbury UK and Trebor Basset UK. The certificate is valid for the period January 2015 to March 2016, meaning that it has expired for financial period Q2’16 down to year end.

There is no public information on a renewal, but the company indicated it had agreed with the Financial Reporting Council of Nigeria that it will not accrue any of the fees till it obtains approvals from NOTAP.

Analysts’ forecast

Analysts expect further decline in dividend payout for the year end 2016 if current financial situation continues. A 65 kobo dividend per share paid against a declined 2015 results was 50 per cent lower than 2014.

For analysts at Cordros Capital Limited, a Lagos based investment house, “overall, we look for 2016 full year revenue growth of 7.0% (previously 6.0%) but have revised earnings before interest, tax, depreciation and Amortisation (EBITDA), and profit after tax, PAT, to decline by 18% and 47% respectively, from 18% and 39% growth previously.

“We have cut 2016 full year target price by 25% to N19.82.

“While 2017-2020 earnings are expected to remain at sub 2013 levels, we believe investors have more than reacted negatively to Cadbury’s shares which are currently undervalued”.

The analysts recommended a ‘BUY’ for Cadbury’s stock.