Analyst retain SELL call on PZ Cussons Nig Plc. After FQ3 2015


Friday, March 20, 2015 3:07 PM / ARM Research


PZ Cussons Nigeria Plc (PZ) reported flat YoY movement in revenues to N52.9 billion for 9 months ended February 2015 while PBT and PAT declined 23%  and 28% YoY to N3.9 billion and N2.8 billion respectively.


PZ also declared an interim dividend of 20kobo per share which translates to dividend yield of 0.8% using its last trading price.


Revenues growth rebounds on higher HPC volumes

In contrast to recent sluggish trends (6M 15: -2.5% YoY), revenues quickened 5.4% YoY to N21.2 billion in FQ3 15 – 8% ahead of our forecasts. Amid persisting unrest in the North and widespread price discounting by peers, moderation in days sales outstanding suggests top-line reading was underpinned by improvement in volumes led by its key Home and Personal Care (HPC) division (~70% of sales). In addition, we believe PZ continues to record double digit growth at its White goods division driven by growing popularity of its Haier Thermocool electricals.


Figure 1: Trends in revenue growth and days sales outstanding

Naira devaluation offsets gains from weaker oil prices
Although mean Brent crude prices were 48% lower YoY at $56/bbl over FQ3 15 (FQ2 15: -18% YoY), COGS rose faster than revenues (+5.6% YoY to N15.5 billion) implying that USDNGN devaluation during the period (-13.5%) neutered the impact of margin gains from benign input costs. The offsetting impact stems from PZ’s high imported raw materials-COGS ratio (FY13: 78%) which leaves the company more exposed to naira weakness on imported petrochemical inputs for HPC goods. Thus, whilst FQ3 15 gross profits rose 5.1% YoY to N5.8billion, gross margins contracted 10bps YoY to 27.1% during the period.

In line with our expectations, operating expense levels continued to rise (+6% YoY to N3.7 billion) reflecting increased Selling and Distribution expenditure as PZ along with companies across our consumer coverage universe try to bolster flagging top line growth. Although operating income rose 46% YoY to N45 million, FQ3 15 operating profits rose 4.2% YoY to N2.1 billion with margins 10bps lower YoY at 10%.

Net finance expense drives negative earnings growth

For the second consecutive quarter, PZ reported a net-finance expense (vs.
trailing 6-quarterly trend of net finance income) in part reflecting a 53% YoY contraction in cash balances to N3.4 billion and short term borrowings which were paid down during the period. Consequently, FQ3 15 PBT and PAT declined 2.2% and 13% YoY to N2.1 billion and N1.3 billion with corresponding margins 80bps and 140bps lower YoY at 9.7% and 6.3% respectively.

Figure 3: Cash ratio and net finance income (expense)

Naira weakness limits upside to FVE from benign input costs
Over the last quarter of FY 15, rising costs of living following the USDNGN devaluation should drive moderation in consumer purchasing power and present headwinds to revenue growth for PZ.
Whilst oil price weakness (-10% MTD) holds benign implications for input costs, pass-through to bottom-line are likely to be tempered by currency weakness and higher S&D costs dimming scope for earnings expansion.

Our fair value estimate for PZ which assumes ~4% CAGR growth for PZ sales in line with trend growth is largely unchanged from previous at
N19.98. PZ trades at a current PE of 26.89x vs. 26.2x for Bloomberg Middle East and Africa peers with its last trading price at a 24% premium to our FVE which implies no changes in our SELL recommendation.

Related News:
PZ Cussons Nigeria rated 'underperform' after Q3 2015 (end-Feb) results
PZ declares 20kobo Interim dividend per share in Q3'14 result,(SP:N25.70k)
Revenue growth remains a challenge - PZ

4.PZ Cussons Q2 2015 - Stock rated an Underperformer estimates under review


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