TheCable

Cadbury Nigeria recorded an all-round cost cutting success in its first quarter trading, raising hopes for a turnaround after its profit dropped to the lowest figure in six years at the end of 2015. The beverage and confectionaries manufacturing company has shown improved ability in revenue growth in the first quarter but its key strength lies in using significantly reduced cost to achieve a naira of sales. Besides that, the company continues to operate with a debt free balance sheet, which shields revenue from the pain of high cost of funds and ensures robust cash flow.

The company had ended last year with a strong last quarter, which lifted it from the verge of a loss position at the end of the third quarter to a net profit of N1.15 billion at full year. That still represented a drop of 46% from the restated net profit of N2.14 billion in 2014 to stand at the lowest profit figure since 2010.

Last year’s operating difficulties stemmed from inability to grow sales volume – which went down by 8.8% to hit the lowest turnover in several years. The company appears to be addressing the selling weakness in the current year, especially with its product re-launch that appears to be gaining market share. Sales revenue moved up 5.8% year-on-year to N7.12 billion at the end of the first quarter, which looks promising to recover the lost sales last year.

Based on the first quarter growth rate, sales revenue is projected at N30.2 billion for Cadbury at the end of 2016. That would be a recovery of 8.6% in the year, still well below the company’s previous turnover figures. Sales revenue growth is expected to speed up in subsequent interims, as economic activity gains momentum and the favourable effect of the product re-launch reinforces sales volume. Beverages are the company’s main product line, accounting for 60% of turnover.

Cost management success is making the difference for Cadbury Nigeria so far this year. Against a moderate improvement in sales revenue, a big turnaround from a loss to an outstanding profit has taken place. The company closed the first quarter with a net profit of N673 million, rising from a loss of N303 million in the same period last year.

Based on the first quarter performance, we project a net profit of N2.5 billion for Cadbury Nigeria at full year. That would be a strong growth of over 117% after profit fell for the second year in 2015. Cadbury’s best year was 2013 when net profit rose by over 74% to a peak of over N6 billion from a moderate increase in sales.

The company is experiencing favourable cost behavior in all key cost lines this year, resulting in a gain in profit margin. Cost of sales declined by 6% in the first quarter against the increase of 5.8% in sales revenue, which raised gross profit margin from 25% in the same period last year to over 33% at the end of the first quarter.

Selling/distribution expenses declined by 11% over the same period and administrative cost also went down by more than 21%. The company therefore used a significantly reduced cost to achieve a unit of sales during the review period. The result is improvement in net profit margin from negative in the first quarter of last year to 9.5% this year.

Earnings per share amounted to 36 kobo at the end of the first quarter, rising from negative 16 kobo in the same period last year. The company is expected to earn N1.33 per share at full year based on the projected profit. Earnings per share had dropped from N1.06 in 2014 to 61 kobo at the end of 2015.