PZ Cussons Nigeria: FX-related losses weigh on 2018 outlook

Proshare

Monday, January 22, 2018 /11:40 AM /FBNQuest Research 

2018E EPS decline of -53% y/y driven by fx-related loss
PZ Cussons Nigeria (PZ) posted H1 2018 (end-Nov) PBT of N869m vs –N425m in H1 2017; the result beat our estimate by 36%. As such, we have raised our EPS forecasts by around 5% over the 2018-20E period. A favourable price volume mix in both the Personal Care and Home Care categories continue to drive sustained sales growth. Looking ahead, we note that the business environment is becoming more competitive and consumer demand remains soft following significant cost inflation in recent quarters. 

Following discussions with management, we believe that PZ’s White Goods segment and sales of bulk milk due to pricing pressures are likely to continue to struggle in the near term. We also understand that naira credit availability which was tight in H1 2018 (end 
Nov) may persist through the year. However, we expect already rolled-out initiatives at the start of H2 2018 (end-May), which is PZ’s peak season, such as distribution expansion and new product launches will help to improve performance during the period. 

We forecast sales growth of 21% y/y to N96.1bn. However, we forecast an EPS decline of c.-53% y/y to N1.69 in 2018E due to the adverse impact coming through from fx-related losses this year. PZ posted fx-related losses of -N2.6bn in H1 2018 alone. Excluding fx-related losses, EPS growth was 36% y/y. Our new price target of N20.5 is up 24% and implies a downside potential of -7% at current levels. Our new PT is driven by market-reflective adjustments to our risk-free rate and equity risk premium assumptions.
 

While we lowered the former by 150bps to 14% we cut the latter by 50bps to 6.0%. We have also rolled forward our valuation to 2019. In 2017, PZ shares appreciated by +42%, in line with the broad market. We retain our Underperform rating on the stock. PZ shares are trading on a 2018E P/E multiple of 13.0x for average EPS growth of 5% y/y over the 2019-2021E period.
 

Q2 2018 PBT up 73% y/y to N1.1bn
In Q2 2018 (end-Nov), while sales of N22.2bn grew 42% y/y, PBT and PAT were up 73% y/y and 110% y/y to N1.1bn and N628m respectively. Gross margin expansion of +172bps y/y to 28.5% and the topline growth delivered during the period more than offset negatives coming through from a double-digit y/y rise in opex and an fx-related loss of –N779m, leading to the PBT growth. The fx loss compares to a loss of –N1.8bn in Q1 2017 (end-Aug). 

Following the Q1 results, management had guided to more fx-related losses during this financial year on account of fx-denominated account payables. PZ has now delivered topline growth for 5 consecutive quarters since Q1 2017. This confirms our view that management may have found a winning formula for its product price-volume mix.
 

Proshare Nigeria Pvt. Ltd.

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