Financial Projection for Cadbury and Lindt | | | Key drivers for a financial projection of Cadbury • ex. sugar-free products). Cadbury has launched a new line of products to catch up on this trend called “better-for-you”. They hope this will allow them to gain market share. Their ambition is to become the biggest confectionary company globally. • (ex. mature vs growth markets) Based on Iryna’s analysis, the confectionary industry has been growing steadily in the 3-5% range and emerging markets had even double digit growth rates. Mature markets are expected to grow with a 3% rate and EM with 5% to 10% depending on the source.
Cadbury is very well present in EM, which will help them to benefit from that growth through the strength and breadth of their market positions, across different geographies and categories. Revenue and growth assumptions To forecast other elements of the IS, BS and CF statements, I looked and historical trends and used information from annual report to decided how to estimate the future values of those elements. Funding requirements The projections shows that Cadbury will further increase its net income based on the assumptions used, but the cash flow is negative at the end of each year.
This comes mainly from the payback of debt and the zeroing out of any future acquisition and discontinuation of operations. We see the importance for Cadbury to have consistent high levels of debt to finance their operations (in line with the debt to equity ratio and liquidity ratio discussed in financial analysis). This is part of their financing strategy and the Dupont ROE shows well how ROE is improved mainly through leveraging. [pic] Concerns and uncertainties regarding the projection The main concern in the projection comes from the high fluctuations in Cadbury activities in investing in intangible assets and discontinuing operations.
These movements have a high impact on their financial statements and are very difficult to predict. Normally these are not considered when valuing a company when they are considered as non-recurrent, but can we really consider this as being true for Cadbury? It seems to be part of their strategy to acquire labels and divest less productive ones. This is very tricky to simulate as the values of those movements depend to a high degree on speculations (see bid from Kraft). Impact of changing key assumptions
Three different scenarios, optimistic, base and pessimistic have been developed to assess the impact on revenues and profitability. (see attached excel file). In the optimistic view, the revenue growth is 10% bigger than base and in the pessimistic view it is 10% lower. No discrimination is made between gain/loss in market growth and gain/loss market share versus base estimation. The other account that is varied at the same time is the income from other investment as percentage of sales. As mentioned before, there seems to be always a certain level of activity in this area at Cadbury. pic] The result on cash flow is significant as shown below: [pic] In the optimistic view the cash, although negative at the beginning, improves to reach black values in 2012, but a repayment of debt due in 2015 will make it negative again. [pic] [pic] Cadbury needs a revolver through the complete projection for both the base and pessimistic case. This shows how sensitive Cadbury to revenue growth. It is important to estimate it accurately to have reliable cash estimates and define the optimal financing strategy. [pic]