PZ CUSSONS : New quarter, same story for HPC player   


Q1’18/19 revenue misses by 9%, prints 14% lower y/y 

High OPEX drags earnings, EBIT down 78% y/y 

PZ records N205 million loss after tax to start the year 

Earnings estimates revised lower following Q1’18/19 flop 

Q1’18/19 revenue misses Vetiva estimate by 9% 

03 OCTOBER 2018 : PZ Cussons released its Q1’18/19 financial statements showing a 14% y/y moderation in revenue to N15.9 billion (Vetiva estimate: N17.5 billion) and beginning the year with a N205 million loss after tax (Vetiva estimate: N1.0 billion PAT). Revenue for the quarter came in as the lowest Q1 performance in three years and 9% below analyst's estimate amidst sustained difficult trading conditions according to the company. 

Though Management has alluded to the implementation of innovative marketing strategies to strengthen growth for the past three quarters, recent performances are yet to show any benefits from these plans. Whilst analysts understand that tighter disposable income has subdued sales in PZ’s Electricals segment, the tepid performance across home and personal care products is quite unimpressive given the stronger turnover trend observed across its competitors. 

Analysts believe a mix of intense competition, slow response to market developments and seemingly weaker brand equity on its HPC products have contributed in reducing market share and limiting pricing power. 

High production costs, OPEX drag operating profit to five-year low 

Gross Profit came in 12% and 24% below analyst's expectation and the prior year respectively amid sustained margin volatility. Gross margin came in at 29%, lower than analyst's 30% estimate and way off 36% recorded in the previous quarter. Meanwhile, a flat y/y performance in operating expenses relative to the 14% y/y decline in revenue was a major drag on earnings. 

Notably, Q1’18/19 EBIT printed at N385 million, significantly behind analyst's N1.9 billion estimate and the lowest figure recorded since Q4’13. However, foreign exchange losses moderated 63% y/y to N668 million, albeit still above analyst's N420 million estimate. Overall, bottom line for the quarter came in negative at N205 million, marginally higher than the N123 million loss recorded in Q1’17/18. 

Bearish on sales capacity for FY’18/19 

Analysts revise their FY’18/19 revenue estimate 10% lower to N75.1 billion (FY’17/18: N80.6 billion) as reduced product prices and a lower volume rollout weigh on the top line figure. Whilst analysts have left their gross margin estimate for the year unchanged, they revise their OPEX to sales ratio 200bps higher following the Q1’18/19 surprise. As such, analysts forecast a 22% y/y decline in operating profit for the year to N6.4 billion (Previous: N9.2 billion). 

Meanwhile, having revised their FX losses higher to N2.5 billion (N2.0 billion), analyst's FY’18/19 PAT forecast is revised sizably lower to N2.6 billion (Previous: N4.9 billion, FY’17/18: N1.9 billion). Following this, analyst's 12-Month Target Price of PZ is revised lower to N20.15 (Previous: N23.79). Despite the unappealing earnings results for the financial year, the stock remains a BUY at the current market price of N12.55. 

Reporting for EasyKobo on Wednesday , 03 October 2018 in Lagos, Nigeria

Source: Ifedayo Olowoporoku  from Vetiva Capital Management Limited

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