Tuesday, April 4, 2017/10:46 AM/FBNQuest Research
Strong sales, gross margin expansion boost bottom line
PZ Cussons Nigeria’s (PZ) Q3 2017 (end-Feb) results were remarkable. The company’s sales, which were its highest in recent times, beat our forecast by 16.9%. The improved revenue was primarily driven by price increases.
Product-wise, although the Electricals category is still struggling, the Home and Personal care segments generated healthy volumes.
The results indicate that PZ is on a recovery path. Strategies introduced by the company to improve topline are paying off, coupled with seasonality impact on sales.
Despite the improvement in fx liquidity during the quarter, the company recorded a N1.2bn fx loss as a result of fx purchases from the parallel market to augment production needs.
However, its impact on the overall result was reduced by a combination of the strong topline growth and impressive gross margin, leading to a significant increase in profitability.
On the back of the results, we are increasing our 2017-18E earnings forecasts by 44% on average and our price target by 13.6% to N16.2 (implying a 15.6% potential upside).
The stock currently trades on a 2017E P/E multiple of 7.6x for an EPS decline of -49.0% in 2018E. A risk to our valuation is a further devaluation of the naira.
Although PZ shares have shed -3.5% ytd, it has outperformed the NSE ASI by 2.5%. We retain our Neutral rating on the stock.
Q3 2017 results recap
PZ’s Q3 2017 (end-Feb) sales grew by 19.0% y/y to N23.8bn while both PBT and PBT advanced by over 100% y/y.
Gross margin expansion of 820bps y/y to 32.5% more than offset a N1.2bn fx loss to lead to a PBT of N2.8bn during the quarter.
The company is still benefitting from using old and relatively cheaper raw materials, like in the prior quarter.
Regarding the fx loss, fx related trade payables increased by 11.1% in Q3 from N41.5bn in Q2 2017 (end-Nov). Sequential trends were similar to the y/y changes.
Sales grew by 44.1% q/q, enough to offset the negative impact of a -183bps q/q gross margin contraction, an 11.0% q/q rise in operating expenses and a 391.9% q/q increase in fx losses.
As such, PBT advanced by 38.6% q/q. The PAT, which was up 70.5% q/q, grew faster than the PBT due to a -76.4% q/q decline in the minority interest charge.
Over the nine month period, PZ reported revenue growth of 12.8% y/y, gross margin expansion of 759bps y/y to 33.6%, a marginal y/y rise in opex and net interest income of N150m (vs –N390m in prior year).
Cumulative fx loss was N6.1bn. However, PBT still grew by 10.0% y/y to N2.4bn while PAT of N1.5bn was flattish y/y.