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PZ Cussons Nigeria Q2 2019 Results Review: Earnings Driven By Muted FX Impact

Stock & Analyst Updates	5383 VIEWS
Stock & Analyst Updates
5383 VIEWS

Thursday, January 24, 2019 12:19 PM / FBNQuest Capital

EPS forecast cut by -35% over the 2019-21E period

PZ Cussons Nigeria (PZ) posted a PBT growth of 55% to N1.4bn in H1 2019 (end-Nov). The result was supported by a lessened fx impact; fx losses of –N525m were posted versus –N2.6bn in H1 2018. Absent fx changes, adjusted PBT for H1 was down 46% y/y. PZ’s H1 earnings were affected by weaknesses across key business lines. According to management, volumes and margins remain under pressure. Lately, PZ has focused on optimising price points and pack sizes across key brands in the portfolio but recent results still show weak topline growth relative to historical levels.

Looking ahead, we see a more competitive business environment fraught with sluggish demand growth. We therefore believe that PZ’s White Goods segment (c.27% of sales; driven by discretionary spending) will likely to face the biggest struggle in the near term. We forecast that sales and adjusted EPS will decline by -8% y/y and -49% y/y to N74.1bn and N1.04 in 2019E respectively.

We however expect the impact of easing fx pressures to offset weaker sales y/y, and forecast that unadjusted EPS (which accounts for fx devaluation losses) for 2019E will more than double to N0.97. We have cut our adjusted EPS forecasts by around -35% over the 2019-21E period. We have also rolled forward our valuation to 2020. Our new price target of N11.4 therefore implies a -40% cut and a downside potential of -3% at current levels.

Our price target cut is also driven by market-reflective adjustments to our risk-free rate, which we increased by 200bps to 15%. PZ shares are trading on a 2020E P/E multiple of 10.4x for average EPS growth of 12% y/y over the 2020-2022E period. In 2018, PZ shares lost -43% and underperformed the broad market which was down -17.8%. We retain our Underperform rating on the stock, given the weak earnings outlook over the near-to-medium term.

Q2 2019 PBT up significantly

In Q2 2019 (end-Nov), sales of N19.2bn fell by 14% y/y, but PBT and PAT were up 48% y/y and 100% y/y to N1.6bn and N1.4bn respectively. However, a double-digit decline in opex and N143m recorded in FX gains more than offset any negatives coming from the y/y sales decline and a gross margin contraction of -608bps y/y to 22.4%, leading to the PBT growth.

Sequentially, sales were up 21% y/y while both PBT and PAT climbed back into positive territory compared with a loss of –N205m each. Compared with our forecasts, while sales came in 4% behind our N20.0bn estimate, PBT and PAT significantly outperformed, thanks to a -33% lower-than-expected opex and the fx gain versus our fx loss estimate of –N667m.

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