PZ: Modest cut to estimates; PT unchanged

Proshare

Thursday, March 26, 2015 3:22 PM / FBN Capital Research

Maintaining Underperform rating: PZ Cussons Nigeria’s (PZ) Q3 2015 (end-Feb) showed that sales grew for the first time (albeit by just mid single digits) in six quarters. This growth was influenced by strong performance in its laundry and detergent business and slightly improved sales in the North. On the back of the results, we have made a modest -3.9% average cut to our 2015-16E EPS forecasts but our N16.2 price target (PT) is unchanged, implying a potential downside of -36.6% from current levels. PZ shares have gained 7.4% ytd (ASI: -13.8%) and are currently trading at a 2015E P/E multiple of 28.2x for a flattish EPS growth in 2016E, dearer than Nestle Nigeria (2015E P/E multiple of 26.6x for 13% EPS growth in 2016E). As such, we retain our Underperform rating.

Q3 2015 PAT down 14% y/y to N1.2bn: PZ’s Q3 2015 (end-Feb) results showed 5% y/y sales growth to N21.2bn while PBT and PAT declined by 2% y/y and 14% y/y to NN2.1bn and N1.2bn respectively. That PAT declined faster than PBT was due to an 818bp y/y increase in tax rate which management attributed to adjustments in accruals for deferred tax. A mild gross margin contraction of 9bps y/y to 27.1% and a 6% y/y rise in opex explain the flattish PBT. A higher tax rate of 34% compared with 25% in the corresponding period of 2014 weighed on PAT. Sequentially, sales, PBT and PAT were all up 28% q/q, 92% q/q and 71% q/q respectively. The q/q trend was mainly due to seasonality effects and as such is not surprising. Compared with our estimates, sales beat by 6.2% while PBT and PAT missed by 3% and 14% respectively.

Outlook: In addition to concerns around stiff competition in Southern Nigeria and insecurity in the North, management is also mindful of the impact of naira devaluation. As such, the company is looking to implement pricing plans and sizing to mitigate potential margin erosion. We have modelled a marginal gross margin decline from 26.0% for 2015E to 25.4% on average over the 2016-2018E period. We expect a -21.7% y/y decline in 2015E PAT to N4.0bn and 4.4% growth on average for the 2016-18E period.



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