Monday, March 21, 2016 08:54AM /Vetiva Research
· Q3 revenue stronger q/q, remains lower y/y
· Tight FX supply tapers margins
· Slight revision to forecasts, TP, SELL rating maintained
Q3 revenue stronger q/q, remains lower y/y
Tracking historical performance, Q3 came in stronger than the preceding quarters though y/y revenue remained lower. Nonetheless, the 9M revenue performance which was down 4% y/y beat our estimate by 3% as we may have been overly bearish following statements by parent company, PZ Cussons UK, that it expected the seasonally stronger second half for the Electricals segment to be significantly lower if current economic conditions persisted.
The December festive season, two additional Cool World stores and the strength of the market leading Haier-Thermocool brand may have provided some support; regardless, we think the segment will remain under pressure for the rest of the year.
Tight FX supply tapers margins
Gross margin contracted 287 bps to 24.3% in Q3 from an average of 27.2% for the preceding two quarters, reflecting the impact of the tight FX liquidity environment. Also, bucking the cost cutting trend across the sector, operating expenses (as a percentage of sales) remained higher y/y, though it trended lower in Q3 from the preceding quarters.
On a positive note, interest expense slowed in line with management’s guidance with a zero borrowing balance maintained. Overall, profit after tax was lower 41% y/y for the 9M period - the third consecutive year with a reported profit decline.
With revenue and EPS 5-year CAGR of 3% and -9% respectively, we think PZ may need to take another critical look at its business strategy (despite its many market leading brands) and cost structure (in particular its high exposure to imported raw materials).
On a non-earnings related note, we highlight the 4% decline in PZ Cussons UK shareholding of PZ to 66.81% from 70.95% as at FY’14/15 which is contrary to the share acquisition trend over the last few years.
Slight revision to forecast, TP, SELL rating maintained
Following this result, we have revised our FY’15/16 revenue to N69.7 billion (Previous: N67.8 billion) but maintain our EPS forecast at N0.62. Consequently, our 12-month target price is little changed at N22.21 (Previous: N22.18).
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