PZ Cussons Plc: Increased finance charges erode earnings

PZ Cussons Nigeria Plc (PZ Cussons) is a foremost conglomerate company involved in the manufacturing and sales of consumer products and home appliances in Nigeria. The Company’s product lines include soaps, detergents, toiletries, hygiene products, pharmaceuticals, cosmetics, packaging materials, refrigerators, freezers, and air conditioners. PZ Cussons is also a wholesale distributor of several brands of milk products, such as ‘Coast’, ‘Olympic’ and ‘Nunu’. The Company recently released its second quarter results for the period ended November 30th 2016, which shows a not so impressive performance, as the Company’s earnings declined due to reduced revenue growth, increased in operational and other expenses, and significant increase in financial

INTENSE INDUSTRY COMPETITION DECLINES REVENUE

For the Second quarter ended November 2016, PZ Cussons’s recorded a decline of 3.29% in revenue to N30.62 billion from N31.66 billion in the corresponding period of 2016. The decline is believed to be a result of an intensely competitive environment, declining consumers’ disposable income, and unrelenting market disruptions in the NorthEastern region of the country due to the activities of boko haram sect. Furthermore, cost of sales for the second quarter ended November 2016 decreased moderately by 3.36% to N22.30 billion from N23.07 billion in November 2016; driven by the Company’s investments in streamlined supply chain, favourable prices of palm oil in international markets and replacement of imported raw materials with local ones. Expectedly, the company’s gross profit decreased by 3.09% to N8.32 billion from N8.57 billion achieved in the corresponding period of 2016, despite the reduction in sales cost earlier mentioned.

REDUCTION IN OPERATING EXPENSES NOT ENOUGH TO HELP PROFITABILITY

During the period under review, distribution, administrative and other expenses dropped by 5.05% to N6.99 billion in the second quarter period ended November 2016 from N6.66 billion in the corresponding period of 2014. The reduction in operational expenses occurred despite the company’s increased investment in branding and innovation to help increase its clientele base and market share. This is in addition to expenses on repairs, maintenance and upgrade of some of the company’s facilities. The continuous spending on sustaining the visibility of its Premier, Joy and Imperial Leather brands and baby care products including Nigerian Baby Care and Cussons Baby Range all have significant costs implications. Finance costs during the period under examination increased by a massive 507.19% to N303m from N49m largely due to increased borrowings during the financial period. Expectedly, pre-tax earnings during the period under examination reduced significantly by 40.64% to N1.15 billion from N1.94 billion recorded in the corresponding period of 2014. Net income also followed suit with a decline of 45.92% to N779m from N1.44 billion over the period.

INCREASED LIABILITIES SLIGHTLY ERODES NET ASSETS

Total assets showed a growth of 8.06% to N72.81 billion in November 2016 from N67.39 billion in May 2015. This can be attributed to a slight rise of 1.40% in property, plant and equipment to N25.57 billion from N25.22 billion over the period. Specifically, a growth of 12.04% in financial assets to N47.25 billion in November 2016 from N42.17 billion in May 2015 and a massive growth of 144.48% in cash and cash equivalents to N5.69 billion in November 2016 from N2.33 billion in May 2016 were the major contribution for the growth in Total Assets.

Total liabilities grew substantially by 29.71% to N30.76 billion in November 2016 from N23.72 billion in May 2015, driven primarily by a rise of 36.08% in total current liabilities to N26.62 billion from N19.56 billion over the period. Regardless, the working capital declined by 8.77% to N20.62 billion from N22.61 billion likewise the shareholders’ funds dropped by 3.71% to N42.06 billion from N43.67 billion over the period.

WE RECOMMEND A HOLD

Competition within the Nigerian Fast Moving Consumer Goods (FMCG) sector remains especially stiff in PZ Cussons’s core Personal Care and Home Care segments. The proliferation of Chinese products across almost all PZ’s products rage at very competitive prices may have also caused the Company’s inability to grow its revenue. We however expect consumer demand to improve during the current year under the new government as focus on critical reforms and policy actions commence in the third quarter of 2016. Furthermore, considering the efforts of the governments and key stakeholders at curbing the security challenges in the northern part of the country, there is a strong likelihood that the business activities of PZ Cussons in the region will return to normalcy soon. However, it must be pointed out that the Company’s performance over the period is below expectation. While the insurgency in the northern part of Nigeria has a serious negative impact on performance, the problem has been around for so long that the management of PZ is expected to have developed a diversification strategy as a conglomerate to mitigate its effects on revenue. In addition, a more efficient operation may have produce a better result in result the bottom line if implemented at a time domestic demand is faced with significant challenges. Considering the aforementioned, we revise our projected full year May 2016 revenue estimate to N45.93 billion and net income forecast of

N1.56 billion. As a result, we forecast

a year-end May 2016 earnings per share of N0.39 and forward priceto-earnings multiple (P/E) of 55.78x.

Using an industry P/E multiple of

44.85x we arrive at a six month average target price of N17.61 Since this represents a potential downside of 19.59% on the current stock price, we therefore place a HOLD recommendation on the shares of PZ Cussons Nigeria Plc.

COMPETITION WITHIN THE NIGERIAN FAST MOVING CONSUMER GOODS (FMCG) SECTOR REMAINS ESPECIALLY STIFF IN PZ CUSSONS’S CORE PERSONAL CARE AND HOME CARE SEGMENTS. THE PROLIFERATION OF CHINESE PRODUCTS ACROSS ALMOST ALL PZ’S PRODUCTS RAGE AT VERY COMPETITIVE PRICES MAY HAVE ALSO CAUSED THE COMPANY’S INABILITY TO GROW ITS REVENUE