1

Cadbury Nigeria Plc- Brighter Outlook

March 23-

2011

Disclaimer Policy This publication is produced by FSDH Securities Limited (FSDH Sec) a subsidiary of First Securities Discount House Limited (FSDH) solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of the FSDH for actions taken as a result of information provided in this publication.

FSDH Equity Research Report

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BBBUUUYYY Current Price N25.00

Fair Value N32.16

Beta 0.75

Alpha Coefficient (0.0002)

R2 8.76%

Z-Score 1.82

Executive Summary

Cadbury Nigeria Plc (Cadbury) is principally engaged in the manufacture and sale of branded fast moving consumer goods

and processing of cocoa to butter, powder, liquor and cake. It sells its products in the Nigerian market, West Africa and

South Africa. Cadbury Nigeria Plc is a subsidiary of Cadbury Plc, incorporated in the United Kingdom. Cadbury Plc, through

Cadbury Schweppes Overseas Limited (CSOL), held 75% of the issue and fully paid share capital of the company as at

December 2009. The remaining 25% is held by Nigerian individual and institutional shareholders. The increase in the

shareholding of CSOL occurred following the 2009 Rights Issue in which CSOL took up its rights in full and applied for

additional shares, demonstrating its commitment to the Company’s future.

In February 2010, Kraft Foods Incorporated, a firm founded in Illinois, United States in 1903, completed the takeover of

Cadbury Plc when the shareholders approved to purchase 71.7% of the firm at a value of US$18.9bn. The acquisition of the

parent company of Cadbury Nigeria Plc may mean a change of name for Cadbury Nigeria Plc and introduction of new

products into the Nigerian market, to meet the growing needs of customers. It is unclear if Kraft Foods will opt for delisting of

Cadbury Nigeria from the NSE, following the acquisition. Cadbury has a majority shareholding of 93.25% in Stanmark

Cocoa Processing Company Plc (SCPCL) located in Ondo State. SCPCL produces a range of intermediate products such

as cocoa butter, liquor and powder. The cocoa butter and liquor are exported to a wide range of international customers,

while the cocoa powder is consumed locally. Cadbury Nigeria Plc’s entire cocoa powder requirement is sourced from

SCPCL. It also exports to Cadbury Ghana Ltd and Cadbury South Africa.

Cadbury’s brands fall into two principal categories namely: food drinks and confectionery. Cadbury Bournvita is the main

food drink brand while Tom Tom and Buttermint are the main brands in the Confectionery stable. The board of the

Company recently endorsed a business plan to discontinue a number of famous brands such as RICHOCO, STIMOROL,

BUBBA bubblegum and CADBURY ECLAIRS, in order to refocus on a smaller range of profitable brands. In executing this

plan, the Company’s management prioritized the development of its core and most profitable brands – Bournvita, Tom Tom

and Buttermint - to drive and achieve robust results.

As at December 2009, the total assets of Cadbury were financed by a mix of equity and liabilities in the proportion of

50.17% and 49.83%, respectively. Total shareholders’ fund of Cadbury grew from a negative position of N3.01bn in 2008 to

N12.67bn in 2009, translating to an increase of 520.39% between the periods. The increase in total shareholders’ fund was

primarily driven by capital raising exercise of the company by way of Rights Issue of 2,568,628,106 ordinary shares of

50kobo each at N8.65 per share on the basis of 7 new ordinary shares for every 3 ordinary shares held as at 26 June 2009.

On completion of the rights issue, 2,028,347,543 ordinary shares with a nominal value of N1.01bn and a premium of

N16.53bn were allotted. Following the success of the rights issue, bank overdrafts and other short term borrowings were

paid off in December 2009. The management believes this will support the company’s future ability to operate profitably by

removing the interest burden and allow reinvestment for growth and rebuilding of its balance sheet.

Applying two valuation methods to value the shares of Cadbury; we arrived at a fair value of N32.16 per share. We estimate

a dividend per share of N0.52 for FY 2010 based on dividend payout of 75%. Buying the stock at the current market price of

N25 and the price appreciates to our fair value of N32.16 and adding the present value of the 5-year forecast dividend,

investors will record a total gain of 42.05%. Relating this gain to the cost of equity, estimated by CAPM, of 16.71%,

investment in Cadbury shares at the current market price will record an alpha return of 25.34%. The 2010 estimated

earnings yield based on our fair value generates 2.17%, while the 2010 estimated Dividend Yield based on N0.52. Dividend

Per Share at our fair value generates 1.63%. Although the estimated earnings and dividend yield for 2010 are low, we

believe that the future of Cadbury in the Nigerian market is bright and the company is well positioned to take advantage of

the ensuing opportunities in the market. We therefore place a BUY on the shares of the company at the current price for

capital appreciation and future dividend payment.

3 FSDH Research

1.0 Corporate Information

Cadbury Nigeria Plc (Cadbury) is principally engaged in the manufacture and sale of branded

fast moving consumer goods and processing of cocoa to butter, powder, liquor and cake to the

Nigerian market, and for exports in West Africa and South Africa. Cadbury Nigeria Plc is a subsidiary of

Cadbury Plc, incorporated in the United Kingdom. Cadbury Plc, through Cadbury Schweppes Overseas

Limited (CSOL), held 75% of the issue and fully paid share capital of the company as at December

2009. The remaining 25% is held by a highly diversified spread of Nigerian individual and institutional

shareholders. The increase in the shareholding of CSOL occurred following the 2009 Rights Issue in

which CSOL took up its rights in full and applied for additional shares, demonstrating its commitment to

the company’s future. Other than CSOL, no shareholder held more than 5% of the issued share capital

of the company as at December 31, 2009.

In February 2010, Kraft Foods Incorporated, a firm founded in Illinois, United States in 1903, completed

the takeover of Cadbury Plc when the shareholders approved to purchase 71.7% of the firm at a value

of US$18.9bn. The Chief Executive of Kraft Foods – Ms. Irene Rosenfeld said that the combination of

Kraft Foods and Cadbury creates a global power house in snacks, confectionery and quick meals. She

added that the two entities have impressive global reach and unrivalled portfolio of iconic brands with

tremendous growth potentials. The acquisition of the parent company of Cadbury Nigeria Plc may

mean a change of name for Cadbury Nigeria Plc and introduction of new products into the Nigerian

market, to meet the growing needs of customers. It is unclear if Kraft Foods will opt for delisting of

Cadbury Nigeria shares from the Nigerian Stock Exchange (NSE), following the acquisition.

Through innovation and commitment to quality, Cadbury continues to grow despite the challenging

economic conditions. Its history is steeped in a tradition of bringing quality products to the market.

Focusing on performance and productivity, it encourages its people to develop new ideas and put fresh

approaches into practice. Hand-in-hand with this is a strong sense of responsibility to the communities

in which it operates. Cadbury does not only measure its success in financial terms; how it achieves its

results is equally important. It conducts its business with integrity by respecting its employees,

consumers, communities and the environment.

In 2009, the board of the company endorsed a business plan to discontinue a number of famous

brands such as RICHOCO, STIMOROL, BUBBA Bubblegum and CADBURY ECLAIRS, in order to

refocus on a smaller range of profitable brands. In executing this plan, the company’s management

Cadbury is engaged in the manufacture and sale of branded fast moving consumer goods and processing of cocoa to butter,

powder, liquor and cake.

In February 2010, Kraft Foods, completed the takeover of Cadbury Plc when the shareholders approved to purchase 71.7% of the firm at

a value of US$18.9bn.

The acquisition of the parent company of Cadbury Nigeria Plc may mean a change of name for Cadbury Nigeria Plc and introduction of new products into the Nigerian market, to meet the growing

needs of customers.

Cadbury does not only measure its success in financial terms; how it achieves its results is equally

important.

4 FSDH Research

prioritized the development of its core and most profitable brands – Bournvita, Tom Tom and

Buttermint - to drive and achieve robust results. Cadbury focused on reorganizing its route to the

market by establishing closer partnerships with distributors; increasing the availability and display of

BOURNVITA and other brands in more locations; stabilizing trade prices across the country; restoring

confidence of key distributors and customers despite the credit squeeze; and implementing robust

order and stock processes to ensure high customer service levels. We believe the decision to

discontinue some product lines will help the company to become more efficient and improve the bottom

line.

1.1 Business: Cadbury’s brands fall into two principal categories namely: food drinks and

confectionery. Cadbury Bournvita is the main food drink brand while Tom Tom and Buttermint are the

main brands in the Confectionery stable. The contribution to group’s turnover from the confectionery

and food drinks portfolio in 2009 was 91%. Cadbury has a majority shareholding of 93.25% in

Stanmark Cocoa Processing Company Plc (SCPCL) located in Ondo State Nigeria. SCPCL produces a

range of intermediate products such as cocoa butter, liquor and powder. The cocoa butter and liquor

are exported to a wide range of international customers, while the cocoa powder is consumed locally.

Cadbury Nigeria Plc’s entire cocoa powder requirement is sourced from SCPCL. It also exports to

Cadbury Ghana Ltd (CGL) and Cadbury South Africa (CSA).

Table 2: Directors’ Shareholding as at May 31 2010

Director Position No of Shares

Atedo Peterside Chairman 20,232,071

Alan Palmer Mgr. Director/CEO 350,000

Lawrence MacDougall Non Ex-Director Nil

Oyeyimika Adeboye Director 90,000

Adedotun Sulaiman Non Ex-Director 1,000,000

Ibukun Awosika Non Ex-Director Nil

Alan Williams Non Ex-Director Nil

Table 3: Company Summary

Ticker Cadbury

Sector Food/Beverages & Tobacco

Date of Incorporation January 09, 1965

Date of Listing 1976

Financial Year End December

Number of Fully Paid Share 3,129,188,160

Current Capitalization(NGN) 78,229,704,000

NSE Capitalization (NGN) 7,789,094,226,203.29

% of NSE Capitalisation 1.00

52 Week high NGN 34.84

52 Week low NGN 17.81

YTD Return (%) (2.42)

52 Weeks Average Volume Traded 1,130,612

Trailing EPS NGN -

Trailing P/E ratio (X) -

Table 1: Shareholding Structure as at December 31, 2009

Shareholders No of Shares Held % of Shareholding

Cadbury Schweppes Overseas Ltd 2,346,891,120 75

Others 782,297,040 25

Total 3,129,188,160 100.00

We believe the decision to discontinue some product lines will help the company to become more efficient and improve the bottom line.

5 FSDH Research

2.0 Review of Nigerian Economy

Provisional data from the National Bureau of Statistics (NBS) indicates that Nigeria’s Gross Domestic

Product (GDP) grew by 7.86% in Q3 2010, slightly higher than the revised 7.69% as at Q2, 2010.

Overall, the Nigerian economy was relatively stable with mixed outcomes. According to Central Bank of

Nigeria (CBN), growth in aggregate credit to the domestic economy (net) was similarly sluggish at

6.13% in December 2010 compared with 59.6% recorded in the corresponding period of 2009. This

development is connected to the damaged balance sheets of the DMBs in the wake of the global

financial and economic crises. However, aggregate credit to the Federal Government, as well as State

and Local Governments, grew by 67.83% and 19.17%, respectively in 2010. Credit to the private sector

contracted by 4.92% in contrast to the indicative benchmark growth of 31.54% for 2010. However,

justifying this development, the CBN said, the outcome would need to be considered in the context of

the purchase of non-performing loans with face value of over N2trn from the DMBs by the Asset

Management Company of Nigeria (AMCON) in 2010. These loans were purchased at a discount and

paid for by AMCON using zero-coupon bonds. Adjusting for this factor, growth in credit to the private

sector would appear to be positive, since the loans were transferred to the balance sheet of AMCON.

The growth in credit to the three tiers of government against the backdrop of the decline in private

sector credit is a reflection of the fact that government borrowing had to some extent, crowded out

private sector credit. Inflation rate (year-on-year) moderated but it remained in double digits throughout

2010 and closed at 11.80% as at December, 2010. Exchange rate was relatively stable in 2010.

Interest rates, particularly, inter-bank rates declined in 2010 as a result of Federal Government

statutory allocations and quantitative easing strategy of the CBN to salvage the banking system from

an imminent collapse. However, the reluctance of banks to extend credit to the private sector remains a

big threat to domestic real sector. In addition, the recent decision of the MPC to hike rates is also a

disincentive to real sector borrowing. Thus, the resolution of the credit crisis will help to boost economic

growth in the domestic economy.

We reiterate the need for the nation’s economic managers to implement policies that can lay a solid

foundation for the economy in the medium to long run especially in the area of agriculture and

manufacturing in order to broaden the revenue base of the country. The President, Dr. Goodluck

Jonathan appears determined in laying a strong foundation to overcome the problem in the power

(electricity) industry by bringing the sector under his office. There are also plans to privatize Power

Holding Corporation of Nigeria (PHCN) in order to run the corporation more efficiently and profitably in

the interest of the consumers.

However, the reluctance of banks to extend credit to the private sector remains a big threat to domestic real sector.

Provisional data from the National Bureau of Statistics (NBS) indicates that Nigeria’s Gross Domestic Product (GDP) grew by 7.86% in Q3 2010, slightly higher than the revised 7.69% as at Q2, 2010.

Exchange rate was relatively stable in 2010.

6 FSDH Research

The outlook of the foreign exchange rate in the medium term appears stable as the CBN is determined

to meet all genuine demand for foreign exchange. The latest measure is the commencement of forward

trading in foreign exchange. The rising price of oil at the international market is also a good

development for the foreign exchange market.

We believe that the current administration would implement policies to diversify the productive base of

the economy so that the economy is less vulnerable to international oil price volatility. Furthermore, the

new administration is embarking on a number of reform agenda to stimulate the economy and

strengthen public expenditure management especially in job creation.

3.0 Review of Nigerian Manufacturing Sector

Our analysis of the operating environment shows that the manufacturing and distribution businesses in

Nigeria are faced with infrastructure challenges (relevant transportation and power). While government

is currently working to improve roads across the country through Public-Private-Participation (PPP)

arrangement, we believe the same effort should be extended to the rail transport across the country. In

order to meet their power needs, manufacturing companies invest heavily in alternative sources of

power. The cost of acquiring and maintaining these equipments add substantially to the operating

costs. While the manufacturing firms sometimes shift some of these costs to their customers in form of

increase in the price of goods, the firms bear a portion of it. The extent of the shiftability also depends

on the elasticity of the product in question to price. Sometimes we notice a drop in demand, as a result

of increase in price. In addition to the problem of infrastructure, the unwillingness of banks to lend to

the private sector especially manufacturers has reduced credit to the real sector, while the available

credit commands high interest rates, thus increasing financing costs for the manufacturers. The

combination of these factors has limited the growth of the manufacturing sector in the country, despite

the huge market potentials within Nigeria and in the neighboring countries. In the last few years, the

manufacturing sector has not witnessed significant improvement as the capacity utilization fluctuates

between 35% and 40%. Its contribution to the Gross Domestic Product (GDP) as at Q3, 2010 was

3.49% lower than 3.93% as at Q2, 2010, while the growth rate is 7.86%, higher than 7.69% in Q2,

2010. This is considered too low for a country that has huge consumption power like Nigeria; having an

estimated market size of 150million. One of the opportunities for the operators in the Fast Moving

Consumer Goods (FMCGs) industry is the growing middle class whose tastes and life style are

changing for high quality consumer goods and products.

Government is currently working to improve roads across the country through Public-Private-Participation (PPP) arrangement; we believe the same effort should be extended to the rail transport

across the country.

The outlook of the foreign exchange rate in the medium term appears stable

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The Nigerian manufacturing industry is relatively small in relation to the size of the domestic economy.

The sector has not grown remarkably over the years due to factors such as neglect of the sector for

crude oil, epileptic power supply, collapsing infrastructure, among others. Although the Nigerian

government maintains that the industry is the main instrument of rapid growth, structural change and

self sufficiency, it has not pursued specific policies that can improve the performance of the

manufacturing industry. We however commend the recent efforts of the CBN to make soft loans

available to Small and Medium Scale Enterprises (SMEs) and to have an arrangement with Nigerian

banks to restructure some of the loans extended to the manufacturers. Some quoted manufacturing

companies, especially the highly capitalized stocks, managed to show impressive performance in the

face of the global economic and financial meltdown. While others, especially those with imported inputs

or had credit lines from foreign banks, which they did not hedge against exchange rate movement,

were hit by exchange rate loss. The fact that some of the FMCGs have low income elasticity of demand

to economic factors helped to insulate the revenue of the operators. However, we note the possible

negative impact of the current job cuts in the financial sector on aggregate purchasing power in the

long run.

4.0 Cadbury Corporate Governance

The company recognizes the importance of adhering to the best corporate governance principles and

practices and the valuable contribution made by adherence to such standards to long term business

profitability and accountability to its shareholders. The current management is extra careful following

the discovery of financial misstatements in the account of the company a few years ago. An increased

focus on corporate governance is at the forefront of it’s renewable plans and in 2009, a number of

initiatives were put in place in line with the code of Best Practices on Corporate Governance in Nigeria,

to further strengthen the company’s corporate governance practices and processes. The initiatives are

as follows:

Board of Directors- Composition and Independence

Board- Training and Access to Advisers

New Board Committees – Nomination & Governance and Compensation Committees

In 2009, four new Non-Executive Directors were appointed to the Board to increase the diversity of

experience as well as objectivity and independence of thought to Board deliberations and decision

making. In all, the Board has a total of seven directors, five of whom are non-executive directors. The

positions of the Chairman of the company is separated from that of the Managing Director and are

occupied by different people.

The current management is extra careful following the discovery of financial misstatements in the account of the company a few years ago.

8 FSDH Research

The company has induction programme for new Directors in which the company’s business structure

and operation are covered and in depth and requisite information provided to assist new Directors in

discharging their duties effectively. Two new board Committees were set up in 2009, the Nominations

& Governance Committee and the Compensation Committee, under terms of reference approved by

the Board. The Nominations & Governance Committee is empowered to bring to the Board

recommendations regarding the appointment of any new Executive or Non-Executive Director. The

committee is also tasked with reviewing existing governance procedures and practices in light of

current domestic and global developments in corporate governance. The Compensation Committee is

responsible for making recommendation to the Board on the remuneration of Directors and senior

executives of the company.

The company also has an audit committee in place, which comprises six members made up of 3

shareholder representatives and 3 representatives of the Board of Directors. All these measures are in

place to ensure that the interest of all stakeholders in the company are protected and well taken care

of.

4.1 Strategic Focus Looking ahead, Cadbury strategic roadmap will include the following:

Prioritize and focus on core brands for profitable growth;

Reinvest in assets and capabilities;

Refinance;

Promote good corporate governance;

Excite and re-engage with their loyal consumers the Company’s famous brands - BOURNVITA,

TOM TOM and BUTTERMINT;

Sustain national marketing & advertising programmes to communicate the benefits of their brands

and increase the availability of their products;

Continue innovation of their brands whilst closely monitoring the needs and opinions of their

consumers;

Aggressively manage costs by aggressively pursuing improved efficiency and effectiveness of its

manufacturing and distribution processes;

Relentlessly focus on quality and value for all its consumers; increase diversity across its

organization, to fully reflect the wide talent base available in the country;

9 FSDH Research

Execute a sustainable environmental strategy, reflecting both continued close relationships with

local farmers & cocoa bean suppliers in Ondo state and ensuring a reduction of water usage and

improvements in waste water quality;

Rebuild the corporate brand of Cadbury Nigeria Plc as a preferred supplier and company of choice

for employees and other stakeholders.

In addition to these, we are of the view that Cadbury will work out strategies to market Kraft foods

products in Nigeria in line with the acquisition of the parent company.

4.2 Strengths & Opportunities Strong brand in the market

Strong Research & Development capabilities, leveraging on parent company

Strong roots in local markets and first-hand knowledge of local culture

Large population that offers huge market potential

Ability to source raw materials locally

Stable macroeconomic environment

Strong link with foreign technical partners

Backward integration strategy with cocoa processing firm.

4.3 Weaknesses & Threats

Reduction in purchasing power of the citizenry due to rising unemployment

Inadequate physical infrastructure in the country

Credit crunch in the system due to unwillingness of banks to lend money to the real sector

5.0 Analysis & Recommendation Our analysis was based on Cadbury Nigeria Plc’s Group Account (the company and its subsidiary SCPCL Account)

for the period ended 12 months December 31, 2009, compared with 12 months December 2008. For the computation

of CAGR, the base period is 2007. Our choice of 2007 was to eliminate the effect of the accounting misstatements

discovered in its books in 2006.

5.1 Capital Structure Total shareholders’ fund of Cadbury grew from a

negative position of N3.01bn in 2008 to N12.67bn in

2009, translating to an increase of 520.39%

between the periods. The increase in total

shareholders’ fund was primarily driven by capital

raising exercise of the company by way of Rights

The increase in total shareholders’ fund was driven by capital raising exercise of the company by way of Rights

Issue

7.19%

73.54%

19.27%

Composition of Shareholders' Fund-2009

Paid up share capital Share Premium Revaluation Reserves

10 FSDH Research

Issue of 2,568,628,106 ordinary shares of 50kobo each at N8.65 per share on the basis of 7 new

ordinary shares for every 3 ordinary shares held as at 26 June 2009. On completion of the rights issue,

2,028,347,543 ordinary shares with a nominal value of N1.01bn and a premium of N16.53bn were

allotted and fully paid. Following the success of the rights issue, bank overdrafts and other short term

borrowings were paid off in December 2009. This led to an increase of 121.44% in share premium from

N7.23bn in 2008 to N16.01bn in 2009. The management believes this will support the company’s future

ability to trade profitably by removing the interest burden and allow reinvestment for growth and

rebuilding of its balance sheet.

General reserves improved from a negative position of N15.04bn in 2008 to a negative position of

N9.05bn in 2009. The long term assets of Cadbury stood at N14.31bn in 2009 from N14.59bn in 2008

and represented a decline of 1.92%.

The current assets increased by 17.45% to N10.94bn in 2009 from N9.31bn in 2008, which was due to

the increase in Deposits/Balances & Cash that increased by 204.90% to N5.03bn in 2009 from

N1.65bn in 2008. Stock declined by 15.61% to N3.03bn from N3.59bn in 2008, trade debtors declined

by 38.17% to N1.35bn from N2.18bn in 2008, other debtors & prepayments declined by 12.78% to

N1.48bn from N1.69bn in 2008, also dues from related companies declined by 71.43% to N57.16mn

from N200.06mn in 2008. Stocks comprise of domestic sales 88.94% and export sales 11.06%. Adding

the long term assets and the current assets of the company together, the total assets grew by 5.63% to

N25.25bn in 2009 from N23.90bn in 2008. This represents a CAGR of 1.97% between 2007 and 2009.

Following the success of the

rights issue, bank overdrafts and

other short term borrowings

were paid off in December 2009.

35

(3,013)

12,665

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007 2008 2009

N'm

n

Shareholders Funds (2007-2009)

3,081.45 720.76

16,234.98

24,282.62 23,901.21 25,246.93

500.00

10,500.00

20,500.00

30,500.00

2007 2008 2009

N'm

n

Capital Employed Vs Total Assets (2007-2009)

Capital Employed Total Assets

The total assets of Cadbury

were financed by a mix of equity

and liabilities in the proportion of

50.17% and 49.83%,

respectively.

11 FSDH Research

The total assets of Cadbury were financed by a mix of equity and liabilities in the proportion of 50.17%

and 49.83%, respectively. As at December 2009, the total assets of Cadbury stood at N25.25bn, while

total liabilities stood at N12.58bn. The short term liabilities stood at N9.01bn, accounting for 71.63% of

the total liabilities, while the long-term liabilities stood at N3.57bn accounting for 28.37% of the total

liabilities. The long term liabilities are gratuity and other long term employee benefits.

The working capital stood at N1.93bn at the end of December 2009, an increase of 113.89% from a

negative N13.87bn as at the end of the previous year. In addition, the current ratio and the quick ratio

as at December 2009 stood at 1.21x and 0.88x respectively. This means that Cadbury is in a

favourable position to meet its short-term obligations as at when due.

The capital employed (i.e total assets less current liabilities) increased from N3.08bn in 2007 to

N16.23bn in 2009, representing a CAGR of 129.53% but achieved a growth of 2,152.49% between

2008 and 2009. The debt ratio, which is the proportion of the company’s total assets that is financed by

both long term and short term liabilities decreased to 49.83% from 96.98% in 2008.

5.2 Liquidity The current assets of Cadbury

increased from N8.30bn in 2007 to

N10.94bn in 2009, representing a

CAGR of 14.81% and increased by

17.45% between 2008 and 2009.

The only contributor to the increase

between the immediate two years is

-12,902.46 -13,867.19

1,926.69

-14,100.00

-9,100.00

-4,100.00

900.00

5,900.00

2007 2008 2009N'm

n

Working Capital (2007-2009)

3,046.62 3,733.53 3,569.75

21,201.17 23,180.45

9,011.95

1,000.00

9,000.00

17,000.00

25,000.00

33,000.00

2007 2008 2009

N'm

n

Long-Term Vs Current Liabilities (2007-2009)

Long Term Liabilities Current Liabilities

50.17%49.83%

Funding Mix - 2009

Equity Liabilities

Cadbury is in a favourable position to meet its short-term

obligations as at when due.

12 FSDH Research

cash & cash equivalents (up by 204.9% to N5.03bn). The growth in net assets between the two years

was reduced, as a result of decline in other contributors to current assets. Stocks decreased by 15.61%

to N3.03bn from N3.59bn. Trade debtors decreased by 38.17% to N1.35bn from N2.18bn in 2008,

other debtors & prepayments decreased by 12.78% to N1.48bn from N1.69bn in 2008 and due from

related companies (down by 71.43% to N57.16mn). The current liabilities decreased from N21.20bn in

2007 to N9.01bn in 2009, representing a CADR of 34.80% between the period and a decrease of

61.12% between 2008 and 2009. The current ratio increased to 1.21x in 2009 from 0.40x in 2008. The

quick ratio also increased to 0.88x in 2009 from 0.25x in 2008.

An analysis of the cash flow statement shows that the net cash flow from operating activities increased

by 144.18% to N4.36bn from N1.78bn in 2008. The significant growth in gratuity payments to

employees which increased by 243.46% from N329.70mn in 2008 to N1.13bn in 2009 impacted on the

net cash provided by operating activities. There was additional capital investment of N761.54mn in

2009 to help in the rebranding of its products. This led to a reduction in net cash outflow from investing

activities which reduced to N281.38mn, a reduction of 35.53% over N436.49mn used up last year. The

major contributors to the capital investment are capital-work in progress and plant and machinery

accounting for 92.04% and 5.91% respectively. The company generated about N281.26mn from

interest income an increase of 85.05% from N151.99mn generated in 2008 on account of its good

liquidity position. The proceeds of Rights Issue of the company was the only financing inflow which

helped to pay back the short term loan and interest obligations.

Thus, the net increase in cash & cash equivalents in 2009 stood at N3.38bn, an increase of 575.52%

from a negative position of N710.43mn in 2008. The cash and cash equivalent as at December 30,

2009 stood at N5.03bn, representing an increase of 204.90% from N1.65bn in 2008.

5.3 Profitability Its Turnover increased from N19.94bn in 2007 to N25.59bn in 2009, representing a CAGR of 13.28%

and increased marginally by 5.30% between 2008 and 2009. Turnover is broken down into domestic

sales and export sales representing 88.94% and 11.06% respectively. This shows that the effort of the

current management to run the company more efficiently is producing results.

The current ratio increased to 1.21x in 2009 from 0.40x in 2008. The quick ratio also increased to 0.88x in 2009 from 0.25x in 2008.

The effort of the current management to run the company more efficiently is

producing results.

13 FSDH Research

The cost of sales decreased marginally by 1.82% to N16.86bn in 2009 from N17.17bn in 2008, lower

than the growth in the turnover, thereby leading to a growth of 22.45% in Gross Profit (GP) from

N7.13bn in 2008 to N8.73bn in 2009. Selling & Distribution expenses increased by 46.46% to N3.19bn

in 2009 from N2.18bn in 2008, while Administrative expenses decreased by 18.62% to N3.36bn from

N4.12bn in 2008. The Earnings Before

Interest, Tax, Depreciation and

Amortisation (EBITDA), increased by

166.89% from N596.09mn in 2008 to

N1.59bn in 2009, while Earnings Before

Interest and Tax (EBIT) increased by

118.10% from a negative of N852.79mn

in 2008 to N154.38mn in 2009.

The net interest expense of about N2.53bn reduced the operating profit to a Loss Before tax (LBT) of

N2.38bn, an improvement of 16.44% over the LBT of N2.85bn recorded in 2008. The strategy of the

company to pay off the short term high cost of fund with the proceeds of the Rights Issue will position

the company on a higher profitability level as the interest expense will reduce significantly going

forward.

The return on equity stood at negative of 9.79% in 2009. Also, the return on assets stood at 0.61%, an

increase from a negative of 3.57% recorded in 2008. Return on capital employed increased to a

positive of 0.95% in 2009 from a negative of 118.32% in 2008. Cadbury’s GP margin increased to

34.10% in 2009 from 29.32% in 2008. EBITDA margin increased to 6.22% in 2009 from 2.45% in 2008.

The contribution of staff to the company’s turnover increased between 2008 and 2009, as Turnover per

staff increased to N17.39mn in 2009 from N13.52mn in 2008, but staff cost per staff increased to

19,937

24,298 25,586

1,000

11,000

21,000

31,000

2007 2008 2009

N' m

n

Turnover

88.94%

11.06%

Turnover in 2009 by Geograpghy

Domestic Export

-4.20 -2.85 -2.38

-1.87

0.60 1.60

-15.00

-11.00

-7.00

-3.00

1.00

5.00

9.00

13.00

2005 2006 2007

N'b

n

PBT Vs EBITDA (2007-2009)

PBT EBITDA

The company’s profitability will increase on account of payment

of short term high cost of funds

14 FSDH Research

N40.75mn in 2009 from N5.72mn in 2008.

Table 4: Profit & Loss Account (N’mn)

2009 2008 Change (%) 2007 CAGR (%)

Turnover 25,586 24,298 5.30 19,937 13.28

Cost of Sales 16,860 17,173 (1.82) 15,112 5.63

Gross Profit 8,725 7,125 22.45 4,825 34.47

Operating Profit 154 (853) 118.10 (2,537) -

EBITDA 1,591 596 166.89 (1,872) -

LBT (2,379) (2,848) 16.44 (4,198) (24.71)

Tax 1,144 95.44 1,098 3,471 (42.60)

LAT (1,240) (2,670) 53.91 (721) 31.09

Balance Sheet (2006-2009) N’mn

2009 2008 Change (%) 2007 CAGR (%)

Long Term Assets 14,308 14,588 (1.92) 15,984 (5.39)

Current Assets 10,939 9,313 17.45 8,299 14.81

Total Assets 25,247 23,901 5.63 24,283 1.97

Current Liabilities 9,012 23,180 61.12 21,201 (34.80)

Long Term Liabilities 3,570 3,734 (4.39) 3,047 8.25

Total Liabilities 12,582 26,914 (53.25) 24,248 (27.97)

Working Capital 1,927 (13,867) 113.89 (12,902) -

Shareholders’ Fund 12,665 (3,013) 520.39 34.82 1,807.13

Table 5: Key Financial Ratio(2007-2009)

2009 2008 2007

Gross Profit Margin (%) 34.10 29.32 24.20

EBITDA Margin(%) 6.22 2.45 (9.39)

PBT Margin (%) (9.30) (11.72) (21.06)

ROE (%) (9.79) (10.72) (2,071)

ROCE (%) 0.95 (118.32) (82.32)

Collection Days 36.86 38.91 34.95

Payment Days 19.26 32.81 25.62

Current Ratio (x) 1.21 0.40 0.39

Debt Ratio (%) 49.83 96.98 87.31

Long Term Debt to Equity (%) - - -

Interest Cover(x) 0.05 (0.40) (1.36)

EPS(N) - - -

DPS(N) - - -

Net Asset Per Share(N) 4.05 (2.74) 0.03

15 FSDH Research

5.4 Management Efficiency The EBIT Margin of Cadbury improved to a positive of 0.60% from a negative of 3.51% in 2008, while

its EBITA margin improved to 6.22% in 2009 from 2.45% in 2008. Cadbury’s average collection period

stood at 19.26days in 2009, down from 32.81 days in 2008, while the payment period also decreased

marginally to 36.86 days in 2009 from 38.91 days in 2008. With the decision of the company to

streamline its products and possible alliance with Kraft Foods, the profit margin of the company should

improve further in the next few years.

5.5 Investment Analysis The investment analysis of the company in the last 3 years has not been impressive. The reason for

this can be linked to the impact of the clean-up in the company following financial misstatements in its

account. Having successfully dealt with the issue and put in place measures to forestall such in the

future, the company is in position to increase the wealth of shareholders in the nearest future.

5.6 Value Added Distribution The wealth created by the efforts of the company’s employees stood at N6.90bn in 2009 from N5.65bn

in 2008, representing a growth of 22.12%. The value added was distributed amongst employees,

investors, government, and assets maintenance in the proportion of 72.92%, 40.80%, (16.57%) and

2.85% respectively.

6.0 Bankruptcy Test – Altman Z- Score Model We used the Z-Score model developed by Edward Altman to determine the probability of Cadbury

Nigeria Plc going into bankruptcy within 2 years from December, 2009. The result of the test shows that

the company scores a rating of 1.82 in 2009, meaning that the company may go into bankruptcy within

72.92%

40.80%-16.57%

2.85%

Value Added Distribution

Employee Investors Government Asset Maintenance

The company is in position to increase the wealth of shareholders in the nearest

future.

With the decision of the company to streamline its products and possible alliance with Kraft Foods, the profit margin of the company should improve further in the next few

years.

16 FSDH Research

2 years based on the published financial for the period ended December, 2009 as it was within the grey

zone. The 4 year Z-Score is presented on the table and chart below. It is however, our opinion that the

company is now strengthened to withstand the impact of the unfavourable condition in the near future

as indicated by the recent result and the efforts of the current management.

7.0 Q3 2010 Unaudited Result Update

The unaudited Q3 2010 result of Cadbury for the period ended September 30, 2010 showed that its

Turnover (TO) increased by 9.47% to N20.73bn, compared with N18.94bn in the corresponding period

of 2009. Profit Before Tax (PBT) increased by 239.48% between 2009 and 2010 to N1.78bn from a

loss of N1.27bn in the corresponding period of 2009. The company paid tax of N505.94mn in Q3 2010.

This brought about 199.76% increase in the company’s Profit After Tax (PAT), which stood at N1.27bn

in 2010, compared with a loss of N1.27bn in 2009. The increase in PBT is also a signal of the good

results going forward.

The company’s profit margins increased in Q3, 2010 over Q3, 2009, and FY December, 2009 figure.

The PBT margin increased to 8.57% in Q3, 2010 from a LBT margin of 6.73% and 9.30% as at Q3,

Table 6: Z-Score Model

2009 2008 2007 2006 2005

OPBIT/Total Assets (0.11) (0.13) (0.18) (0.12) 0.15

Net Working Capital/Total Assets 0.08 (0.58) (0.53) (0.32) 0.31

Sales/Total Assets 1.01 1.02 0.82 0.65 0.92

Market Value of Equity/Total Liabilities 2.61 0.98 1.67 1.30 3.09

Accumulated Retained Earnings/Total Assets (0.36) (0.63) (0.51) (0.39) 0.24

Share Price (December) 10.49 23.89 36.85 32.46 65.52

Market Value of Equity 32,825 26,299 40,566 35,733 65,575

Z-Score 1.82 (0.39) (0.12) 0.11 3.99

3.99

0.11

-0.12 -0.39

1.82

-1.00

-

1.00

2.00

3.00

4.00

5.00

2005 2006 2007 2008 2009

Z-SCORE (2005-2009)

The company is now strengthened to withstand the impact of the unfavourable

condition in the near future.

17 FSDH Research

2009, and as at the end of the financial year in December, 2009 respectively. This shows that the

company’s total costs as a percentage of TO stand at 91.43%, lower than 93.27% recorded in the

corresponding period of 2009. PAT Margin currently stands at 6.13%, up from LAT margins of 6.73%

and 4.83% in the corresponding period of 2009, and as at FY 2009 respectively.

A cursory look at the balance sheet position as at Q3 2010 compared with the position as at December,

2009 shows that the company’s fixed assets increased marginally during the review period. This may

be linked to the capacity expansion of the company during the period. Its fixed assets increased

marginally by 0.10% to N11.43bn from N11.41bn in FY 2009. Stock increased by 8.85% to N3.30bn in

Q3 2010 from N3.03bn in FY 2009. Cash and bank balances increased from N5.03bn in FY 2009 to

N5.67bn in Q3 2010. Cadbury’s short term borrowings further increased significantly by 622.17% to

N1.89bn from 261.43mn as at FY 2009. The company needs to restructure its financing such that it

does not use short term finance to fund long term projects. Cadbury’s working capital increased from

N4.73bn in FY 2009 to N6.31bn in Q3 2010. Also, the net assets increased by 9.09% to N13.88bn from

N12.72bn as at FY 2009.

8.0 Historical Return Analysis

An analysis of the historical return on the investment in the Ordinary Shares of Cadbury Nigeria

between January 04, 2005 and the date of this report showed significant decline in the share price of

the stock due to the various internal problems in the company. The valuation for historical performance

was based on the price as at March 18, 2011 when the price was N25. The profit that investors in the

company earned between 2005 and the date of the valuation is N6,985. There was a Rights Issue in

2009 which we assumed shareholders took and fully paid for. The impact of the Rights and dividend

payment during the period resulted in the profit.

Our illustration using N100,000 initial investment in January 04, 2005 purchased 1,627 units net of

transaction costs. The total number of Rights the investor qualified for at the end of the period was

3,796 units on the basis of 7 for 3 at a cost of N32,835. This resulted in a profit of N6,986.07 a positive

return of 5.26%. The total dividend earned during the period was N4,246, while there was no bonus

issue during the period. The share price depreciated by 57.63% from N59 in 2005 to N25 as at March

18, 2011.

Cadbury’s working capital increased from N4.73bn in FY 2009 to N6.31bn in Q3 2010.

18 FSDH Research

9.0 Valuation

In arriving at a fair value for the ordinary shares of Cadbury, we used two valuation methods:

Discounted Free Cash Flow Method (DCF) and Relative Valuation Method (Enterprise Value/Earnings

Before Interest Tax Depreciation and Amortization (EBITDA). We project Turnover, Earnings Before

Interest and Tax (EBIT), Earnings Before Interest Tax Depreciation and Amortization (EBITDA), Profit

After Tax (PAT) and Dividend Payment for the periods ending December 2010, 2011, 2012, 2013 and

2014.

We estimate the Turnover of N28.78bn, N35.98bn, N43.54bn, N51.59bn and N61.13bn for 2010,

2011, 2012, 2013 and 2014, respectively. We estimate EBIT of N4.82bn, N6.30bn, N7.62bn, N8.25bn

and N9.78bn for the same period, based on EBIT Margin of 16.75% for 2010, 17.50% for 2011 & 2012,

and 16% for 2013 and 2014. We estimate EBITDA of N6.27bn, N7.75bn, N9.07bn, N9.71bn and

N11.24bn for the same period.

Looking at our estimate of the capital expenditure of the company within the forecast period and the

notional tax on EBIT for the same period and adjusting for the net working capital, we arrived at Free

Cash Flow (FCF) of N5.93bn, N6.52bn, N7.71bn, N8.22bn and N9.47bn.The forecast PAT of

N2.19bn, N3.46bn, N4.19bn, N4.54bn and N5.38bn is based on PAT margin of 7.6% for 2010, 9.63%

for 2011 & 2012 and 8.80% for 2013-2014. Using a dividend payout of 75% for the period we arrived at

Dividend Payment of N1.64bn, N2.60bn, N3.14bn, N3.40bn and N4.03bn. We applied a terminal

growth rate of 7.86%. We used a beta value of 0.76x based on the changes in the historical returns on

the company share price and the Nigerian Stock Exchange All Share Index (NSE ASI). We used a risk

free rate of 9.12% and a risk premium of 10.04%. Applying foregoing parameters on the Capital Asset

Pricing Model (CAPM), the cost of equity generates 16.71 %, which is our cost of capital. The company

had no long term interest bearing debt in its capital structure as at the last audited account. Using

3.13bn shares in issue, the DCF Model generates N28.59 per share.

Using the EV/EBITDA multiple of 17.56x, we arrived at a fair value of N35.08 per share. Applying a

weight of 45% to the DCF and 55% to the EV/EBITDA, we arrive at a value of N32.16 per share, which

is our fair value. Buying the stock at the current market price of N25 and the price appreciates to our

fair value of N32.16 and adding the present value of the 5-year forecast dividend, investors will record

a total gain of 42.05%. Relating this gain to the cost of equity, estimated by CAPM, of 16.71%,

investment in Cadbury shares at the current market price will record an alpha return of 25.34%. The

19 FSDH Research

2010 estimated earnings yield based on our fair value generates 2.17%, while the 2010 estimated

Dividend Yield based on N0.52. Dividend Per Share at our fair value generates 1.63%. Although the

estimated earnings and dividend yield for 2010 are low, we believe that the future of Cadbury in the

Nigerian market is bright and the company is well positioned to take advantage of the ensuing

opportunities in the market. We therefore place a BUY on the shares of the company at the current

price for capital appreciation and future dividend payment.

5

10

15

20

25

30

35

40

Cadbury Nig. Plc Vs NSE ASI Rebased (March .2009-March .2011)

Cadbury NSE ASI Rebased

20 FSDH Research

Table 7: Valuation Forecast and Parameters – Discounted Future Earnings (DFE)

Year 2010E 2011 2012 2013 2014 Terminal Value

Period 0 1 2 3 4

Revenue (mn) 28,784 35,980 43,535 51,590 61,134

EBIT(mn) 4,821 6,296 7,619 8,254 9,781

EBITDA (mn) 6,265 7,747 9,071 9,709 11,238

FCF(mn) 5,931 6,521 7,714 8,219 9,473

Discount Rate (%) 16.71 16.71 16.71 16.71 16.71

Discount Factor 1.0000 0.8569 0.7342 0.6291 0.5391

Present Value (mn) 5,931 5,589 5,666 5,175 5,112 62,534

Enterprise Value (mm) 89,725

Debt(mn) 261

Equity Value(mn) 89,464

Number of Shares(mn) 3,129

Value Per Share(N) 28.59

Table 8 : Valuation Forecast and Parameters – EV/EBITDA Multiple

Year 2010E

Period 0.11

Revenue (mn) 28,787

EBITDA(mn) 6,265

Enterprise Value (mn) 110,042

Debt(mn) 261

Equity Value (mn) 109,781

Number of Shares (mn) 3,129

Per Share Value 35.08

Table 9 :Valuation Summary

Model Value(N) Weight Price(N)

Discounted Free Cash Flow (DCF) 28.59 45% 12.87

EV/EBITDA Multiple 35.08 55% 19.29

Per Share Value 32.16

Price as at March 18, 2010 25.00

Total Gain (%)* 42.05

* The total gain is inclusive of the present value of the 5-year forecast dividend

21 FSDH Research

Table 10: Annual Capital Growth & Returns Analysis of N100,000 Investment in Cadbury Nigeria Plc since January 04, 2005

Value Receipt Period 2005 2006 2007 2008 2009 2010 2011 Total

Holding As At January 1,627 1,627 1,627 1,627 1,627 5,423 5,423 5,423

Bonus Shares Received - - - - - - - -

Cumulated Holding 1,627 1,627 1,627 1,627 5,423 5,423 5,423

Dividend Earned 2,343 1,904 - - - - - 4,246

Rights Issue - - - - 3,796 - - -

Cost of Rights - - - - (32,835) - - -

18-Mar-2011

Accumulated Shareholding 5,423

Increase in Shareholding (%) 233.31

Price (N) 25

Market Value (N) 135,575

Total Dividend (N) 4,246

Value of Investment (N) 139,821

Cost of Investment (N) 132,835

Profit (N) 6,986

% Increase 5.26

Table 11: FSDH Research Earnings Forecast for Cadbury Nigeria Plc (2010-2014)

2010 2011 2012 2013 2014

Turnover(N’mn) 28,784 35,980 43,535 51,590 61,134

EBIT(N’mn) 4,821 6,296 7,619 8,254 9,781

EBITDA(N’mn) 6,265 7,747 9,071 9,709 11,238

PBT(N’mn) 3,217 5,093 6,162 6,676 7,911

Tax(N’mn) 1,029 1,630 1,972 2,136 2,532

PAT(N’mn) 2,188 3,463 4,190 4,540 5,380

Dividend Payment(N’ mn) 1,641 2,597 3,143 3,405 4,035

EBIT Margin (%) 16.75 17.50 17.50 16.00 16.00

EBITDA Margin (%) 21.76 21.53 20.84 18.82 18.38

PBT Margin (%) 11.18 14.15 14.15 12.94 12.94

PAT Margin (%) 7.60 9.63 9.63 8.80 8.80

EPS(N) 0.70 1.11 1.34 1.45 1.72

DPS(N) 0.52 0.83 1.00 1.09 1.29

Earnings Yield (%) 2.17 3.44 4.16 4.51 5.35

Dividend Yield (%) 1.63 2.58 3.12 3.38 4.01

P/E Ratio(x) 46.00 29.06 24.02 22.17 18.71

Number of Shares(mn) 3,129 3,129 3,129 3,129 3,129

Dividend Payout (%) 75.00 75.00 75.00 75.00 75.00

22 FSDH Research

Contacts:

For enquiries please contact us at our offices:

Lagos Office: UAC House (5th-8th Floors) 1/5 Odunlami Street, P.M.B 12913 Lagos. (Tel.) 234-1-2702881-2 (Fax) 234-1-2702890 Port Harcourt Office: Afribank Bank Building (2nd floor, 5 Trans Amadi Road, Port Harcourt (Tel) 234-084-463308 (Fax) 234-084-463174. Abuja office: Orji Uzor Kalu Plaza, Plot 979, 1st Avenue, Off Ahmadu Bello Way, Cadastral Zone AO, Central Business District, Abuja. (Tel) 234-09-6700535

(Website): www.fsdhgroup.com, www.fsdhsecurities.com

(Email) fsdhsecurities@fsdhgroup.com

Disclaimer Policy

This publication is produced by FSDH Securities (FSDH Sec) a subsidiary of First Securities Discount House

Limited (FSDH) solely for the information of users who are expected to make their own investment decisions

without undue reliance on any information or opinions contained herein. The opinions contained in the report

should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may

invest substantially in securities of companies using information contained herein and may also perform or seek

to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing

this document, no responsibility or liability is accepted by any member of FSDH or FSDH Sec. for actions taken

as a result of information provided in this publication.

Table 12: Comparative Analysis

Company Cadbury Nestle DSR NBC Average

Turnover 25,586 68,317.30 82,395.71 90,195.98 66,624

Gross Profit 8,725 28,360.53 20,760.16 26,053.01 20,975

EBITDA 1,591 17,297.47 21,154.83 9,211.96 12,314

PBT (2,379) 13,783.24 19,586.93 4,327.64 8,830

PAT (1,240) 9,783.58 13,185.60 7,921.00 7,414

Total Assets 25,247 44,250.37 78,707.22 66,373.48 53,645

Current Liabilities 9,012 19,010.97 35,038.91 27,229.81 22,573

Long Term Liabilities 3,570 14,695.47 2,055.52 9,316.77 7,409

Interest Bearing Liabilities - 14,921.19 - 9,229.73 12,075

Working Capital 1,927 (165.21) 26,003.78 (8,004.34) 4,940

Capital Employed 16,235 25,239.40 43,668.32 39,143.67 31,072

Net Assets 1,927 10,543.94 41,612.80 29,826.90 20,978

EBITDA Margin(%) 6.22 25.32 25.67 10.21 17

Interest Cover(x) 0.05 7.69 39,892.92 5.84 9,973

Debt Ratio (%) 49.83 76.17 47.13 41.03 54

Long Term Liabilities/Equity (%) - 113.06 - - 113

Financial Year as at 31December, 2009.