Tuesday, January 26, 2016 06:35 PM / FBNQuest Research
Event:PZ Cussons UK H1 2016 (end-Nov) analyst presentation
Implications:Improved sales and earnings outlook for PZ Cussons Nigeria in H2 2016
PZ Cussons UK, parent company of PZ Cussons Nigeria, had its interim (H1 2016) analyst presentation today. Please see below some of the highlights.
Group revenue was flat y/y while PBT declined by -3.2% y/y. Nigeria accounts for around 40% of sales.
Management acknowledged challenges such as, fx constraints, pressure for a further devaluation of the naira and the tough trade environment in Nigeria. Performance in the Home and Personal Care segment was robust. However, the Electrical business was subdued given that customers shied away from the white goods market. Nonetheless, the firm maintained its dominant market share.
The company’s strategy is to mitigate the impact of the deteriorating macro environment on its Nigerian business. For the HPC segment, PZ intends to manage margins by improving volumes. Management stated that it is adjusting the size of the toilet soaps to maintain price points and increasing the size of the laundry bars to make them cheaper to buy. PZ also aims to align with current consumer realities by diversifying product range.
On the assumption that there will be a further devaluation, stock of raw materials (tallow) has been increased. Buying fx at the parallel market increased input costs and reduced the amount of oil that could be imported due to the scarcity of dollars at the interbank. PZ has agreements in place with all local suppliers of palm oil to serve as buffers although local oils require further processing to ensure the quality is up to standard.
In addition, PZ has stopped selling oil in bulk and has moved on to branded products which deliver higher margins and improve profitability (although lower top-line). PZ Wilmar edible oil brands, Mamador and Devon Kings’, showed good first half growth. Backward integration of PZ Wilmar is going well. At the same time, overheads in the factory have been reduced.
Management noted the reduction in consumer disposable income as the major factor affecting the Electrical business. As a result, they are changing the whole supply chain to bring in smaller, more affordable fridges from China. They stated that import volumes were down 14% (vs. 50% for competitor) since the last devaluation of the naira (Feb 2015). So they are quite comfortable that market share is increasing.
On government policy, management is quite pleased with the present administration who are tackling corruption and insecurity as promised. Management also believes the present policies are fair as the government is trying to develop local productivity. As such, a refusal to further devalue should encourage companies to backward integrate.
PZ stated that Nutricima is benefiting from improved distribution to the north, following some success in the fight against Boko-Haram but opined that business decisions should be made faster.
Highlights from Q1 2016 results
In Q1 2016, sales of N15.0bn were flattish y/y, but PBT and PAT declined markedly by -37.3% y/y and -32.1% y/y to N547m and N377m respectively. Although gross margin expanded by 68bps y/y to 27.6%, partly due to inventory on hand, its impact on the bottom line was offset by a significant increase in net finance charges to N165m from an income of N41m in the prior year as well as an opex increase of 7.5% y/y.
The 32.1% PAT decline could have been worse but for a -48.4% y/y decline in the tax charge as well as a -41.2% y/y decline in minority interest. Sequentially, sales, PBT and PAT fell by -26.4% q/q, -78.7% q/q and 75.8% q/q respectively. We attribute the trend to seasonality effects as Q4 is typically the strongest quarter for PZ, although 2014 was an exception.
The Q2 2016 result should be released shortly. We estimate a -2.1% y/y decline in sales and a -10.8% y/y decline in PBT. Although the above points show that it is doing its best, the market has already priced in this and more. The company currently trades on a 2016E P/E multiple of 27.7x for EPS growth of 7.9% in 2017E and shows a downside potential of -13.8% to our price target of N18.11. We rate the stock Underperform.