Friday, January 29, 2016 10:48 AM / FBNQuest Research
PT unchanged as we roll over valuation to 2017E
PZ Cussons Nigeria’s (PZ) Q2 2016 (end-Nov) results surprised negatively, posting a PBT decline of -43.4% y/y, and missed our estimate by -36.5%. We had reduced our 2016-17E EPS forecasts by 15.0% on average earlier this week. This reflects the degree to which the company has been affected by fx constraints and a tough trading environment in Nigeria. As such, we are cutting our 2016-17E EPS estimate by -9.1% on average.
Our price target remains unchanged because we have rolled over our valuation to 2017E. Our price target of N18.1 implies a potential downside of -10.8% from current levels. We continue to find PZ’s valuation demanding, with the shares trading on a 2016E P/E multiple of 29.9x for 11.9% EPS growth in 2017E. The shares have shed -18.3% ytd (vs. -17.6% for the NSE ASI). We reiterate our Underperform rating.
PBT and PAT both down y/y
Q2 2016 sales of N15.7bn declined -5.9% y/y. PBT and PAT also declined markedly by -43.4% y/y and -58.2% y/y to N606m and N300m respectively. The decline in PBT was due to a -53bp y/y contraction in gross margin to 26.8% and a 52.7% y/y increase in finance charges. The PAT decline was as a result of a higher tax rate (42.0% in Q2 vs 25.2% in prior year).
Sequentially, sales and PBT were up 4.8% q/q and 10.8% q/q respectively, driven by a -15.9% q/q decline in finance charges during the quarter. However, PAT declined by -20.5% q/q following a 113.7% q/q increase in tax expense. Compared with our estimates, Q2 2016 sales were behind by -3.9%; PBT and PAT also missed by -36.5% and -48.4%.
The tough macroeconomic conditions are likely to persist into H2. Management stated that the company is adopting several strategies to reduce the impact of the headwinds on earnings. The strategies include downsizing products, price increases, entering into agreements with local suppliers for palm oil supply and overhauling the supply chain to bring in more affordable refrigerators to suit consumer wallets.
Although the company is trying its best, we do not expect these to result in any significant changes in the company’s fortunes in the near term. We expect 2016E sales and PBT to decline by -5.0% y/y and -33.5% y/y to N69.4bn and N4.4bn respectively.