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PZ Cussons Nigeria Plc Q1’18 - FY’18 Begins With a Loss as FX Overhang Persists

Proshare

Wednesday, October 5, 2017 9:59AM/ Vetiva Research

·         Q1’18 revenue outperforms Vetiva estimate, up 5% y/y

·         Notable margin contraction as cost volatility persists

·         Records mild loss in Q1’18 following N1.8 billion FX loss

·         FY’18 EPS estimate revised lower, TP reduced to ₦20.97 (Prev: ₦22.65)

Revenue outperforms for third consecutive quarter

After recording a modest revenue growth in FY’17, PZ maintained the positive sales momentum in the first quarter of its FY’18 financial year as topline rose 13% y/y to N18.9 billion, 7% above Vetiva estimate of N17.7 billion. According to its Parent company (PZ Cussons UK), the sustained robust performance was driven by the Home and Personal Care segments, as well as improving sales from the growth in edible cooking oil product. Meanwhile, trading conditions have reportedly remained tougher in the Electricals segment as volumes continue to underperform amidst depressed discretionary spend.

Bottom line turns negative amidst weaker margins, FX loss

Despite the impressive topline figures, PZ’s bottom line slipped back into negative after recording impressive performances in the two prior quarters. In line with our conservative estimate, gross margin in the quarter contracted to 32% (Q1’16/17: 35%) retreating from the 39% recorded in the previous quarter. However, contrary to the tight cost control seen in recent times, OPEX to sales ratio rose to 22% (Q1’16/17: 21%, Q4’16/17: 16%) vs. Vetiva estimate: 19% following a surge in Administrative expenses (up 43% y/y).

With this, Q1’17/18 EBIT declined 17% y/y to N1.8 billion, 13% behind Vetiva estimate. Bottom line was however completely wiped out by a larger-than-expected N1.8 billion foreign exchange loss on dollar denominated payables (Vetiva estimate: N840 million). With trade receivables down 25% q/q, we believe the FX loss may be as a result of exchange rate differential between acquisition and settlement of its payables. That said, amidst a weaker cash position, PZ drew down its bank overdrafts raising net interest expense to N273 million (Q1’17/18: N97 million). Overall, PZ recorded a loss after tax of N123 million for Q1’17/18, compared to our N958 million profit estimate but much better than the N1.6 billion loss recorded in the corresponding period of the previous year.

FY’18 EPS, Target Price revised lower – SELL rating maintained

With PZ’s parent company also stating plans to implement initiatives through the year to cement the robust topline performance – through distribution expansions and new product launches – we remain optimistic on PZ’s revenue growth for the rest of FY’17/18, particularly in the peak selling season in H2’17/18. Consequently, we revise our FY’17/18 revenue estimate higher to ₦87 billion (Previous: ₦84 billion). However, the FX losses remain a dire concern for bottom line performance given that PZ still has about N20 billion in Trade payables – a portion of which is presumed to be dollar denominated. Coupled with an upward revision to interest expense estimate, we revise our FY’17/18 EPS to ₦0.82 (Previous: ₦1.03). Also, we revise our Target Price downwards to ₦20.97 (Previous: ₦22.65).




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