PZ Cussons Nigeria Maintains Underperform Rating; Sombre Outlook for 2017


Tuesday, August 30, 2016 4:20pm / FBNQuest Research

Earnings and price target revised downwards
PZ Cussons Nigeria’s (PZ) reported another set of weak results in Q4 2016 (end-May). Although sales and PBT were in line with our estimates, we expect the adverse impact of the weak macroeconomic environment on the company to persist into the coming year.

Management of PZ’s parent company (PZ Cussons UK) acknowledged during its FY 2016 analyst presentation that tight liquidity and increased cost in Nigeria due to the scarcity of fx were significant challenges to growth. Also, the devaluation of the naira to c.N280/US$ from c.N197 has forced the company to take an exceptional charge of N29bn in Q4.

Although PZ has made efforts to soften the impact of the headwinds on revenue and maintain margins, these have not been sufficient. Management attributed a -6.7% y/y sales decline in Q4 to lower unit volumes following moderate price increases during the period. Additionally, gross margin contracted y/y in all quarters in 2016 except for Q1 due to old inventory.

As a result, we are cutting our 2017-18E EPS forecasts by -51% on average. (We forecast sales decline of -3.8% in 2017E). We have also increased our risk free rate assumption by 200bps to 14.5%. As such, our N12.2 price target is 29% lower and implies a potential downside of -33% from current levels.

The shares, which have shed -29.2% ytd (NSE ASI: -4.5%), are currently trading on a 2017E P/E multiple of 48.7x for EPS growth of 5.6% in 2018E. We retain our Underperform rating.

Q4 2016 hit by headwinds
PZ’s Q4 2016 results showed that sales of N18.9bn fell by -6.7% y/y. PBT fell by -60.7% y/y to N1.0bn due to a gross margin contraction of -883bp y/y to 21.8%. This gross margin contraction was large enough to offset the impact of a -7.5% y/y decline in opex to N3.2bn and an 874.7% y/y rise in other income to N78m.

PAT declined by -74.9% y/y to N392m because of a -32.7% y/y decline in income tax expense to N526m and a -59.9% y/y reduction in minority interest to N91m.

Sequentially, sales were down -5.8% q/q. PBT grew marginally by 2.1% q/q due to a combination of a -17.5% q/q decline in opex and a 5.8% q/q rise in other income. PAT decreased by -50.7% q/q as a result of a higher tax of 52.2% vs. 30.5% in the corresponding period of 2015 and a 23.1% q/q rise in minority interest charges.

On a full year basis, sales of N69.5bn were down -4.9% y/y. PBT and PAT of N3.1bn and N1.9bn both declined by -52.0% y/y and -54.0% y/y respectively. These declines were due to a gross margin contraction of -306bps y/y to 24.9% and a 74.3% y/y rise in net interest charges to N387m.  

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