Just when you thought Cadbury’s best performance in 3yrs went unnoticed, this happens

Cadbury Plc is still some way off from replicating a stellar 2013 financial performance, but in 2018 the company churned out its best numbers in three years.

In its 2018 scorecard, Cadbury showed improvement since making a loss in 2016, when the Nigerian economy slipped into its first recession in 25 years. But even more impressive was how the numbers stacked up against a five-year trend analysis.

The trend analysis revealed that the food and beverage maker picked up the pieces of a poor year bedevilled by weak consumer purchasing power in 2016 by growing profit before tax from a loss position of N563 million to N360 million in 2017 while after tax turned from a loss of N296 million in 2016 to a gain of N299 million in 2017, a 201 percent increase.

In 2018, that improvement continued. This time, profit before tax surged 249 percent to N1.2 billion from 2017 numbers, while profit after tax rose by 174 percent to N823 million, the highest in three years.

Despite the improvement, however, Cadbury’s 2018 PAT was still some way off the record N6 billion recorded in 2013.

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Cadbury’s bottom-line turnaround was driven more by cost-cutting measures than increased sales.

While Revenue grew below 2018’s average inflation rate (12 percent) at a meagre 8.75 percent, in reflection of an industry-wide struggle of shrinking sales volumes on the back of low demand, Cadbury chalked over half a billion naira (N522 million) from selling and distribution expenses alone in 2018.

When we looked at the breakdown, we found that Cadbury had knocked off N394 million in “redundancy costs” which turned out the biggest driver of the reduction in Selling and Distribution expenses in the period.

Here’s the company’s explanation of how N394 million in “redundancy costs” was saved.

“The 2017 expense related to the Company’s plan to reposition its structure and processes and optimise resources to achieve a simpler and agile performance-oriented organisation. This resulted in the reduction of 149 positions. Agreements were reached with union representatives which specify the number of staff involved and the redundancy compensation package offered by the company, as well as amounts payable to those made redundant, before the financial year end. In 2018, there was no redundancy of this nature.”

Operating costs reduction also helped Cadbury’s operating margin increase to 4.72 percent in 2018 from 2.15 percent in 2017, which means N95 of every N100 of sales was used to pay for variable costs excluding interest and tax.

Not the best margin in an industry with an operating margin average of 11 percent where Nestle boasts the highest margin— 22.77 percent in 2018. But the positive to take away is that Cadbury improved its margin when others fell short.

Nestle’s operating margin declined marginally to 22.77 percent in 2018 from 22.81 percent the year before, while Unilever’s also fell to 9.9 percent from 14.36 percent. Perhaps, Cadbury benefitted from a low base.

Operating margin measures what percentage of revenue is made up by operating income. It therefore demonstrates the strength and profitability of a company’s operations.

It doesn’t stop at operating margin. Cadbury recorded improvements in other key profitability ratios.

Cadbury’s profit margin rose to 2.29 percent from 0.91 percent. A profit margin in low single digits leave much to be desired, particularly as it is below the industry average of 10 percent. However, it still shows progress from last year’s abysmal figure. At this growth rate, Cadbury would have achieved a 15 percent profit margin two years from now, by 2021. In 2018, Nestle had a profit margin of 16.85 percent while Unilever’s was 11.32 percent.

Value investors use the profit margin metric to assess the profit-generating capacity and efficiency of firms. Profit margin represents how much naira of profit the businesses generated for each naira of sale.

Cadbury also recorded improvement in Return on Assets and Return on Equity. In 2018, Cadbury generated more profit per naira of assets compared to 2017 as its ROA went from 1.06 percent to 3 percent in the period. Very low compared to the industry average but again, shows progress. ROA gives investors an idea of how effective the company is in converting the money it earns. The higher the ROA figure, the better, because the company earns more money on less investment.

On the Return on Equity (ROE) front, Cadbury’s ROE more than doubled to 6.49 percent in 2018 from 2.55 percent in 2017, a sign of improvement even though the promise land remains some distance away.

ROE provides investors with insight into how efficiently a firm is handling the funds that shareholders have contributed to it.

Cadbury’s earnings per share nearly tripled to 44 kobo in 2018 from 16 kobo in 2017, also the highest in three years but well behind 2015’s 66 kobo and 2014’s N1.06.

The rally in 2018 went unnoticed by stock investors as Cadbury’s share price shed 36 percent, the most among industry peers in a 2018 bear rout that saw the entire equities market decline some 17 percent as a result of massive foreign outflows driven majorly by policy normalisation by the US Federal Reserve and heightened political risks related to the 2019 general election.

This year, Cadbury is up roughly 10 percent, well above the 5 percent year to date loss of the consumer goods index. But after the 2018 scorecard was published two weeks ago, it seemed investors ignored the company’s improving numbers or had priced it in much earlier, only for the stock to emerge one of the highest gainers last week.

It stock gained 8.91 percent to N11 from N10.10, according to data by the Nigerian Stock Exchange (NSE). That earned Cadbury a spot on the list of top gainers for the week-ended April 18, beating Nestle, the only other consumer goods firm to make the list, to 8th place.