PZ: Another Weak Performance in Q3 2016; Maintains Underperform Rating

Proshare

Tuesday, April 05, 2016 9:52AM /FBNQuest Research  

Fx liquidity still an issue

PZ Cussons Nigeria’s (PZ) results in Q3 2016 (end-Feb) were weaker than expected. PBT declined by -51.8% y/y and missed our estimate by 36.5%. Management has attributed the poor profitability to increased cost of inputs and settlement of terms as a result of fx scarcity.  

This explains a significant gross margin contraction of -281bps y/y during the quarter that filtered through to the bottomline. Consequently, we are cutting our 2016-18E EPS forecasts by -10.4% on average and our price target by -5.1% to N17.1.  

From current levels, we see an implied downside potential of -27.1%. The shares are currently trading on 2016E P/E multiple of 46.7x for EPS growth of 41.1% in 2017E, having shed -8.6% ytd (vs. -10.9% for the NSE ASI). We continue to reiterate our Underperform rating. 

PBT and PAT both down -52% y/y and -41% y/y respectively 

Q3 2016 (end-Feb) sales of N20.0bn declined -5.6% y/y; PBT and PAT declined more significantly by -51.8% y/y and -41.0% y/y to N987m and N795m respectively. The PBT decline was due to a combination of a gross margin contraction of -281bps y/y to 24.3%, a 5.1% y/y rise in opex and a 24.2% y/y increase in net interest expense. These more than offset the impact of a 62.7% y/y rise in other operating income. Below the PBT line, tax expense was -83.1% lower than the prior year.  

However, the y/y decline in PAT was exacerbated by a N74m minority interest charge. Sequential trends were quite different. Sales grew by 27.9% q/q. A 17.1% q/q increase in other operating income and a -37.3% q/q decline in net interest expense more than offset a gross margin contraction of -245bps q/q and a 10.2% q/q rise in opex which led to a 63.0% q/q rise in PBT. PAT grew faster by 165.1% q/q due to a -53.1% q/q decrease in tax expense.

Outlook 

It appears the strategies put in place by management recently to mitigate the impact of the macro headwinds paid off during the quarter, judging by the sequential trends. However, the strain on consumer wallets as well as the difficult trading environment remain, and will most likely feed through into Q4 (end-May).  

We do not expect the positive impact of management strategies to be enough to undo the harm caused by the latter on PZ’s result thus far. As such, we expect 2016E sales and PBT to decline by -5.0% y/y and -51.9% y/y to N69.4bn and 3.2bn respectively. 

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