PZ Cussons Nigeria Is Maintaining Underperform Rating in Q3 2020


Thursday, May 21, 2020 / 09:16 AM / by FBNQuest Research / Header Image Credit: Financial Nigeria


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Marked earnings cuts over forecast period

PZ Cussons Nigeria (PZ) suffered the biggest quarterly loss since 2016 on account of a rising cost profile compounded by stronger competitive headwinds and continued consumer pricing pressure. Q3 2020 (end-Feb) pretax loss of -N2.4bn was 5x higher y/y and 7x worse than our forecast of -N292m, driven by a y/y gross margin contraction of -622bps (-369bps behind our forecast) and 20% y/y increase in opex (47% higher than forecast). Looking ahead to the near to medium term, we do not see a positive turnaround in PZ's fortunes.


To make matters worse, management in a recent trading update pointed to an increase in COVID-related uncertainties, highlighting that the core businesses will be impacted by significant disruptions to both manufacturing and route to market. In particular, we see the bigger struggle coming from the Durable Electricals Appliances business, which is more vulnerable to the deteriorating macroeconomic environment. In addition to changes made on the back of the Q3 negative surprises, our new forecasts incorporate a slowdown in spending as a result of the lockdown and a weaker naira. For 2020E, we now forecast a 3.5x higher pre-tax loss of -N5.1bn and model that earnings will remain in negative territory until at least 2021E.


As such, our new price target of N4.1 is now -16% lower. This reduction was also affected by a downward adjustment to our risk premium assumption by 150bps to 7.5%. Year-to-date, PZ shares have sold off by -19% versus the broad market index which is down -9%. Our target price implies a downside potential of -11% from current levels. We retain our Underperform rating on the stock.


Q3 2020 loss driven by gross margin contraction

Sales increased by 4% y/y, but this growth was completely eroded by a -622bp gross margin contraction to 12.8%. Net interest expense was down -55% y/y while other operating income was up 67% y/y. However, the impact of these positives was negligible relative to the y/y gross margin contraction and opex increase. On a sequential basis, sales were 15% higher q/q but gross margin contracted by -417bps q/q. As such, the pretax loss for Q3 was 5x higher q/q. Relative to our forecasts, sales were 9% ahead of our estimate of N19.0bn, whereas the pre-tax loss was significantly behind due to the opex and gross margin negative surprises.


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