PZ Nigeria Plc FQ2 17- Strong operating performance salvage earnings


Tuesday, January 31, 2016/ 5.25 PM / ARM Research 

PZ Cussons Nigeria Plc. (PZ) released its unaudited 6M 2017 results wherein revenues rose 8.8% YoY to 33.3 billion, though largely reflecting unrealized foreign exchange losses of N4.9 billion, PZ posted pre-tax and post-tax losses of N 425 million and N289 million respectively. Excluding the FX loss reported, PZ would have recognized a PBT of 4.6 billion (+292% YoY).

Higher prices and muted input costs buoy gross margin
In line with trends across FMCG names, revenues tracked higher in FQ2 17 (+6% YoY to N16.5 billion) which PZ links to impact of higher pricing across its product lines. That said, given depressed real consumer incomes, PZ’s parent company noted in its commentary that the price review was negative for volumes.  

Assisted by tamer petrochemical input prices, gross margin expanded 8% YoY to 34.4%, with gross profit rising 5.6% YoY to N5.8 billion. Similar to companies operating in the FMCG space, PZ reported a cut back on opex with corresponding opex-to-sales ratio declining 15pps YoY to 21.4%.  

Lower FX losses amplify earnings expansion
Further down, PZ booked a lower FX loss on its trade payables of N237.2 million (FQ1 17: N4.7 billion) which reflects the high FQ 1 17 base when the company took charges on long standing trade payables following the 43% NGN depreciation in the period. Largely reflecting the benign movements in the exchange rate, PZ reported PBT and PAT of N2 billion and N1.3 billion respectively in FQ 2 17 (vs. pre-tax and post-tax losses of N1.5 billion and N1.7 billion in FQ2 16).  

Operating performance to improve over the rest of FY 17
Over the rest of its fiscal year, management guides to further upward product pricing and size adjustments to capture actual FX sourcing costs and future replacement costs. That said, given the price-sensitive nature of HPC segment and weak consumer real incomes (H1 16: -14% YoY), the strategy should result in volume contraction.  

On input costs, recent rally in crude oil prices should translate to higher costs on the company’s petrochemical inputs. For cost, we are of the view that the implementation of ERP implementation in FQ2 17 support PZ in retaining a tight lid on costs, which thus guides our revised OPEX-sales ratio forecast 1pps lower to 20% (vs our prior forecast of 21%).  

In the light of these revisions, our blended FVE for PZ rises slightly (+2%) to N 16.23 (Last trading price: N14.25). We revise our rating on the stock to a NEUTRAL. 

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