PZ Cussons UK raises concerns about unpredictable market situation in Nigeria

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Thursday, April 14, 2016 3:53 PM / Cordros Capital

This morning, PZ Cussons Group UK -- the parent company of PZ Cussons Nigeria Plc (PZ) - issued a trading update which covers the period 27 January 2016 to 13 April 2016.

Not surprising, the Group noted increasingly difficult trading conditions in Africa, particularly in its main market Nigeria, wherein a lack of availability of the U.S Dollar at the official exchange rate is resulting in the majority of purchases passing through (the parallel market, according to management of PZ Nigeria) at a premium of 50-70%.

The Group stated that though the resultant cost impact is being managed through changes to relative pricing, the persistent pressure on consumer disposable income remains a major challenge.

The Group's forward looking statement points to an extremely unpredictable situation in Nigeria - which should likely have a material impact on 2016FY results - and is supportive of our underweight stance in the earnings note (of 22 March 2016) accompanying the release of the Nigerian subsidiary's third quarter results.

Following the results (which marked three straight quarters of y/y earnings contraction averaging 38%), Cordros Capital cut 2016FY EPS lower to N0.71 (previously N0.97) - representing an expected 38.4% decline from end-2015FY level - and reduced 2017-2019 earnings from initial estimates, on concerns around sales and costs.

On costs, the significant dependence of PZ's operations on imports (about 80%):

Amidst lingering weak inflow of U.S Dollars into the economy and the consequent CBN forex rationing measures - suggests that there appears no near term respite to the forex induced pressure.


In addition to cost pressure, PZ faces the risk of revenue growth being continually thwarted (0.5% average growth in the last three years and down 4.2% in 9M-16) by difficulty adjusting prices and surpassing volumes. Consumer demand remains subdued by

(1) rising cost-push inflation (including pressure on essentials such as energy, transport and utilities);

(2) growing unemployment;

(3) extreme competition; and

(4) weakening discretionary spending, as uncertainty in the macro environment persists.


Management comment on Q3-16 result:

The 5.6% y/y decline in revenue was attributed to the continued challenging trading environment. Whilst the White Goods division was said to have had a good q/q performance (although down y/y), the Home and Personal Care division marginally underperformed.


The 10.2% q/q increase in opex was attributed to restructuring expenses and the impact of service contracts denominated in foreign currency. The only positive variable in the result - 37.3% q/q decline in finance;  was attributed to improved cash balances (following difficulty settling LCs) and the consequent reduced need for short term borrowings.


On the 12.1% effective tax rate posted during the 3 months period (bringing 9M-16 ETR 716bps lower to 23%), management guided to full year rate closing at 30% (same as end-2015 rate).

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