PZ Cussons Nigeria Q1 2017 Results Review- FX Issues Bite Harder


Monday, October 31, 2016/10.41am /FBNQuest Research

Price target lowered by -2.7%
PZ Cussons Nigeria’s (PZ) Q1 2017 (end-Aug) sales were 16.4% ahead of our forecast, helping the gross profit to beat by almost 50%. PZ’s parent company in the UK stated in a recently released trading statement that the company’s performance across its businesses during the period was robust.

Although volumes were down overall (except in the Personal Care business which showed the strongest demand), price increases were supportive. However, the company reported pre and post-tax losses compared with our PBT and PAT forecasts of N384m and N216m respectively.

The variance was mainly down to a N4.7bn fx loss reported during the quarter, due to fx denominated account payables. The balance rose to N33.9bn in Q1 2017 from N25.7bn as of end of FY 2016. There appears to be some slight improvement in fx liquidity, leading to some stability in the naira. As such, additional fx losses may not feature in Q2.

PZ still imports a portion of crude palm oil (CPO) used in production. According to management, this is because the standard of locally sourced CPO is still below that of imported CPO, and it is also more expensive as local suppliers are taking advantage of the government’s restriction of access to fx at the interbank market for CPO imports.

Given that the underlying results were healthy, we are raising our 2017-19E underlying EPS forecasts by 36.1% on average but have lowered our price target (PT) by -2.7% to N11.9 due to the fx loss.

Our PT implies a -28.1% potential downside from current levels. PZ shares have shed -35.8% ytd (NSE ASI: -5.3%) and currently trade on a 2017E P/E multiple of 21.7x for a -36.0% y/y EPS decline in 2018E. We retain our Underperform rating.

Q1 2017 results recap
PZ’s Q1 2017 (end-Aug) results showed that while sales of N16.8bn grew 12.0% y/y, the bottom line showed losses of -N2.4bn and -N1.4bn on the PBT and PAT lines respectively.

The topline growth was impressive given that this is the first time that PZ will record sales growth on a y/y basis in five quarters. Although gross margin expanded by 693bps y/y to 34.5%, the N2.4bn loss before tax was as a result of a foreign exchange loss of N4.7bn during the quarter.

The after tax loss was however reduced to -N1.4bn because of a tax credit of N845m and a positive minority interest contribution of N149m. On a quarterly basis, sales declined by -11.2% q/q, while gross margin expanded by 1,267bps q/q. Other than the fx loss, an 11.8% q/q rise in opex and a -24.7% q/q decline in other operating income also contributed to the pre-tax loss vs. PBT of N1.0bn in prior quarter.  

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