PZ Cussons Nigeria Beats the Odds

Despite stiff competition, lower consumer demand, and the high cost of doing business, PZ Cussons Nigeria Plc has reported improved earnings for the year ended May 31 2017, writes Goddy Egene

One of the problems many manufacturers of consumer products face is competition, as smuggled products are sold cheaper than those locally produced.

The smuggled products are cheaper because they get into Nigerian market through unofficial means without paying the required tariffs. Hence, when companies operating legally pay high tariffs and taxes to bring their products to the market at higher costs and receive low patronage, the smuggled goods are cheaper and get well high patronage.

Listed companies in the manufacturing sector of the Nigerian Stock Exchange (NSE) have been contending with this challenge of stiff competition from companies that neither have factories in the country nor produce the goods but merely import them through illegal means. The poor economic situation of last year compounded the problems as consumers’ income became affected. Consequently, the revenue and profitably of many companies were negatively impacted.

However, adopting various strategies, some of the companies are beating the competition and delivering improved results.

One of the companies is PZ Cussons Nigeria Plc that reported its financial results for the year ended May 30, 2017.

Financial performance

PZ Cussons Nigeria Plc posted a revenue of N79.65 billion, up by 14.5 per cent from N69.52 billion posted in 2016. But in line with the high inflationary trend during the review period, cost of sales went up from N49 billion to N51 billion, while sales and distribution expenses rose from N8.825 billion to N9.09 billion.

However, net finance cost fell from N387 million to N195 million. Consequently, profit before tax stood at N4.811 billion in 2017, up from N3.148 billion, while profit after tax grew to N3.886 billion, from N2.129 billion in 2016.

The directors have recommended a dividend of N1.98 billion, which is 50 kobo per share for the shareholders.

According to the company, it has adapted its management structures to create a truly customer care organisation, saying as part of a global organisation, it has benefitted from global innovations and initiatives of the group.

“In this breadth, our supply chain processes and sales functions have been integrated as a single structure across the globe and across the region,” it said. PZ Cussons Nigeria noted that it is confident of its brands which are leading in the market segments they participate.

“We are going to sustain the current initiatives that have proved to be positive and effective. We will also keep the focus on key brands,” it said.

Meanwhile, trading at the stock market was bullish for the first time in five days following the return of the bulls yesterday.

Analysts’ assessment

Reviewing the performance, analysts at Cordros Capital Limited, said the revenue of N79.6 billion slightly beat their N79.1 billion estimate while the PAT of N3.3 billion is marginally below the N3.4 billion we estimated.

They explained that for fourth quarter (Q4) 2017 (March-May), the revenue growth of 19.1 per cent beat their 16.3 per cent estimate while the PAT growth of 370.7 per cent was ahead of their estimate of 349.2 per cent owing to the significantly lower effective tax rate (15 per cent vs. our estimate of 32 per cent) reported during the period.

“The Q4 result capped the impressive recovery in the group’s performance which began from the second quarter. Higher selling prices, combined with seasonality effect, accounted for the strong double-digit top-line growth the group achieved in each of the last two quarters of the year. While revenue from the Durable Electrical division contracted less (by 0.5 per cent vs. 9.4 per cent in 2016FY), the strong growth (22 per cent vs. -2.3 per cent in 2016FY) achieved by the Branded Consumer goods division (HPC) is consistent with what competitors have reported,” they said.

According to the analysts during the three months period, the group reported 38.8 per cent gross margin, the highest in all quarters of the year, and also historically.

“But adjusting cost of goods sold (COGS) for FX losses, as was the previous practice by the group, produced gross margin of 26.8 per cent, 498 bps higher, but lower than the margins reported in Q3-17 (27.6 per cent) and Q2-17 (32.9 per cent). The FX loss of N2.7 billion reported during the final quarter was the group’s second biggest in 2017FY (N4.7 billion loss was reported in Q1-17), and surprising, given the appreciation of the Naira in the secondary markets where the group said it sourced FX to settle long outstanding trade payables. For 2017FY, the group’s FX loss tripled to N8.8 billion,” they said. Operating expenses increased by 14.9 in Q4 but fell by 6.9 per cent q/q. They noted that as a proportion of revenue, opex was lower (-60 bps y/y and -20 bps q/q).

“For 2017FY, opex grew by a marginal 4.7 per cent, consistent with the benign growth recorded by most consumer goods companies in our universe in 2016FY.

PZ’s latest results are impressive, but given the consistency with consensus, suggesting they are already priced into the stock, we do not expect significant movement in the share price from current level. Besides, from the local investor perspective, the lower dividend proposed (equating to 60 per cent payout vs. 5-year average of 75 per cent) is discouraging,” they said.

Also assessing the results, the results, analysts at FBN Quest said with these results, PZ Cussons has come a long way from mid-2015 to early 2017 when fx liquidity issues in Nigeria hampered itsprofitability. They noted that although the results were strong year/year(y/y), they were relatively weaker than the more impressive Q3 2017 results, explaining that sales and PBT fell by 5.7 per cent q/q and 11.7 per cent q/q respectively while PAT was flattish q/q.

“On a full year basis, sales grew by 14.5 per cent y/y to N79.6 billion while PBT and PAT advanced 52.8 per cent y/y and 78.4 per cent y/y to N4.8 billion and N3.3 billion respectively. The Branded Consumer Goods segment, which advanced by 22.2 per cent y/y to N56.2 billion, accounted for over 70 per cent of the overall sales growth. The Durable Electrical Appliances segment sales of N23.4 billion was, however, flattish y/y. The full year group gross margin expanded strongly, by 604bps y/y to 35.1 per cent . Fx loss came in at N8.8 billion vs N2.9 billion in the prior year. This can be attributed to fx-denominated payables among its current liabilities. Trade payables grew by 54.5 per cent y/y to N39.7 billion in 2017,” they said.

According to FBN Quest, compared with their estimates, Q4 sales was surpassed by 10.8 per cent while PBT was ahead by 26.2 per cent.

“The full year sales and PBT were 2.8 per cent and 11.8 per cent ahead of our forecasts. The company declared a final dividend of 50 kobo which implies a dividend yield of 2.0 per cent . PZ Cussons shares have gained about 78.9 per cent vs the NSE ASI’s 32.5 per cent. By and large, improved fx liquidity has been favourable to PZ Cussons and other consumer goods companies,” they said.