Cadbury Nigeria: Food and beverage

THE COMPANY: Cadbury Nigeria manufactures and markets sugar confectionery, food drinks and food products. The company also processes cocoa and exports cocoa products via its subsidiary Stanmark Cocoa Processing. Cadbury Nigeria holds a 90% stake in Stanmark and obtains 100% of its cocoa requirement from the subsidiary. In February 2010 Cadbury Schweppes Overseas, a wholly owned subsidiary of Kraft Foods, acquired 74.99% of Cadbury Nigeria. The remaining 25.01% equity is held by a group of individuals and institutional investors. Following a major strategic review in 2008, the company commenced an extensive restructuring exercise to restore its path to profitable growth. The review also focused on opportunities to improve efficiency and quality of products through a disciplined approach to international benchmarking and investing in infrastructure projects. These strategies have started paying off, and Cadbury financials are now on a positive trajectory. Fiscal year (FY) 2011 results saw robust growth in revenue, profit and market share. There was significant growth in profitability due to reduced cost of capital arising from debt settlement. In FY11 profit before tax (PBT) and profit after tax (PAT) rose impressively by 160% and 217%, respectively. Capital investments in plants and product streamlining, which started in 2010, have improved cost efficiency and performance. Encouraged by this, the company expects further value creation, coming off the back of aggressive reinvestment in upgraded capacity and increasing capabilities. The acquisition of Cadbury Nigeria by Kraft presents future growth opportunities for Cadbury. Kraft is the second-largest food company in the world, and 12 of the company’s iconic brands generate revenue of more than $1bn annually. The integration of Cadbury Nigeria into the wider Kraft organisation will translate to more markets and visibility for Cadbury Nigeria on the whole. However, there is possibility that when the split is completed, Cadbury Nigeria may explore the option of a name change to the Kraft’s global integration effort.

Prior to 2007, Cadbury Nigeria has a strong history of dividend payment. The company had consistently paid dividends before the discovery of financial misstatement in 2006, which impaired its performance in subsequent years. However, recent performances show that Cadbury Nigeria may resume dividend payment soon, and the reserve position is expected to improve in the near term. From a trading perspective, the stock has begun to reflect this earnings growth. Thus, we expect the share price momentum to continue as improving demographic dynamics and rising demand for consumer goods support the attractive near-term growth of the company.

1Q12 RESULTS HIGHLIGHTS: Underlying 1Q12 revenue trends were impressive as volumes and margins went up, supporting Cadbury Nigeria’s strategy of developing and expanding its core profitable brands. PBT and PAT returned higher in 1Q12 by 86.5% and 94.9% at N587m ($3.8m) and N401m ($2.6m), respectively. Importantly, the debt repayment impacted the bottom line as gross margins consequently improved by 51% to 8.16%. Cadbury Nigeria’s balance sheet position has improved considerably with net assets in FY11 growing by 29% to N16.64bn ($106.5m) while book value per share stood at N5.32 ($0.03). Cadbury Nigeria now has a trailing earnings per share of N1.18 ($0.007), translating to a price earnings multiple of 10.7x.

DEVELOPMENT STRATEGY: According to management, key development strategies for 2012 are: deepening brand loyalty by re-engaging customers via the famous brands Bournvita, TomTom and Buttermint; consolidating and broadening the product range through innovation; maximising competitive advantage via an internal efficiency improvement programme of cost savings; and building a strong, sustainable business model. The company remains cautiously bullish on its future and growth prospects, given that it is still in a recovery trend. However, management sees numerous realistic catalysts in its 2012 strategies that could potentially push both revenue and profitability up.