PZ Cussons : Sluggish Outlook takes a toll on valuation   

08 October 2018 : PZ Cussons Nigeria (PZ) reported loss after tax of N204 million in its FQ1 19 numbers (FQ1 18: Loss after tax of N123 million). The dismal performance stemmed from weakness in its business operation, as the company reported a slump in revenue (-15.9% YoY to N15.9 billion), slower decline in cost of sales (-12% YoY to N11.4 billion) which combined led operating margin to contract 738bps to 2.4%. Analysts highlight the positive of a 62.7% YoY decline in foreign exchange losses to N668 million.


For the rest of FY 19, analysts expect the company to return to profit based on their expectation of sturdier revenues in subsequent quarters, as the company enters its peak seasons. However, overall FY 19 should come in weaker than the prior year, as analysts expect the company to continue to face volume pressures from weak consumer wallets and imported competition. Thus, analysts forecast revenue of N74.9 billion (-7% YoY). 


Additionally, analysts believe the company’s product portfolio lacks sufficient products that are strong leaders in their category and thus see new exciting product innovations as an upside to revenue. Elsewhere, despite lower Crude Palm Oil (CPO) and stable foreign exchange, analysts forecast cost of sales to fall slower by 5.2% YoY due to rising Brent Crude price (+50.4% YoY) which should translate into higher petrochemical prices for the company and pressure cost of sales. 


Overall, analysts forecast FY 19 earnings at N1.95 billion, translating to an EPS of N0.49 (+1.3% YoY). Over their forecast horizon, analysts have cut their EPS forecast by an average of 22% owing to the slow recovery in topline. Analysts have a FVE of N10.12 (previous: N16.57) which translates to a SELL rating based on PZ last trade price.


No respite yet for revenue


On revenue, the parent company in its group’s FQ1 18 trading statement attributed the decline in Nigerian sales to weak consumer disposable income and pressured prices. With foreign exchange more available than a year ago, analysts think PZ’s volumes was pressured by imported competition which might have led the company to lower product prices in a bid to drive sales. 


Despite weaker revenue of 15.9%, cost sales declined slower by 12%, as the company continued to face cost inflation. With global and domestic Crude Palm Oil prices down 16% and 6% respectively, and FX more available and stable, analysts look to higher petrochemical prices as the probable pressure point on cost of sales. Precisely, over the review period, Brent crude was higher 50%, indicating higher petrochemical prices over the period. As a result, gross margin contracted 319bps to 28.5%. To add, analysts suspect a change in its product mix from higher margin to lower margin brands (due to repacking into smaller economy products) impacted on its gross margin.


FX losses moderates further


Foreign exchange losses moderated further in FQ1 19, down 62.7% YoY to N668 million. As at FY 18 (ended May), the group moved from translating its balance sheets from the CBN rate (N305/$) to the NIFEX exchange rate – which averaged N337.84/$ in its fourth quarter of the 2018 fiscal year. However, the NIFEX has depreciated 3.1% to N357.6/$ between August and May which couple with the settlement of some of its FCY related party trade payables (N4.3 billion equivalent) at the prevailing rate ~N360/$ prompted the FX losses reported in the review period.


Modest earnings growth driven by lower FX losses


Although PZ started its fiscal year with a loss, analysts expect the company to return to profit based on their expectation of sturdier revenues in subsequent quarters, as the company enters into its peak seasons. On revenue, the parent company stated that the Nigerian division is focusing on optimizing price points and size across the key brands in its portfolio to support revenue. Irrespective, with tough market conditions and slow recovery in consumer wallets, analysts expect revenue to remain relatively weaker in FY 19 and thus, project a 4.8% YoY decline in revenue to N76.6 billion.


On cost of sales, despite lower CPO prices – which analysts expect to contract further on supply overhang in international markets – analysts expect input cost pressures to persist due to the sustained rise in Brent crude, and by extension, petrochemical prices. Owing to this, analysts forecast cost of sales to decline by 3% YoY to N54 billion. This combined with their FY 19 operating expenses forecast of N16.9 billion (+3.9% YoY) translates to an EBIT of N5.5 billion (-34% YoY) and related margin of 7.2% (-317bps). EBIT margin of 7.2% for FY 19 is lower than PZ’s 5-year historical average of 11%.


On foreign exchange losses, analysts believe PZ’s FCY liabilities was translated at an average NIFEX rate of N348.51/$ as at FQ1 19. However, since the end of PZ’s first quarter, the NIFEX rate has depreciated 3% to N359.61/$ to converge with the NAFEX rate. Given this, as well as its outstanding related party payables of N27 billion (which analysts expect will be paid in FY 19), analysts foresee further FX losses in the subsequent quarter, although projected to slowdown in FH2 19 – as analysts expect the company’s balance sheet to be translated at a rate of ~N360/$ over the second half of 2019. Overall, analysts forecast FX losses of N2.2 billion (-60% YoY) over FY 19.


Largely on account of lower foreign exchange losses, analysts project PZ’s earnings in FY 19 to grow 5.7% YoY to N2.0 billion, translating to an EPS of N0.51. Analysts have a FVE of N10.12 (previous: N16.57) which translates to a SELL rating based on PZ last trade price. On their numbers, PZ trades at a P/E and EV/EBITDA of 25.6x and 4.9x compared to Bloomberg MENA peer average of 19.8x and 10.8x respectively.


Reporting for EasyKobo on Monday , 08 October 2018 in Lagos, Nigeria


Source: Feyisike Ilemore from ARM Securities Limited


NOTE - THIS ARTICLE PUBLICATION IS COPYRIGHT OF ARM SECURITIES LIMITED AND NOT TO BE REPRODUCED OR REPRINTED IN ANY FORM WITHOUT THE EXPRESS PERMISSION OF ARM SECURITIES LIMITED.


                          


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