March 16, 2018/Cordros Update
PZ Cussons Plc (PZC), the parent company of PZ Nigeria Plc (PZN), stated in a trading update released yesterday, that it now expects its profit for the year ending May 2018 will fall short of expectations. Trading conditions in Nigeria and UK were unfavourable in H1, and apparently, the usual peak season uplift has not occurred to the expected level thus far in H2.
In our note published on 20 February, we estimated that PZN’s 2018E net profit will be lower by 7% vs. 2017FY. But the tone of the parent company’s communication of this earnings warning has raised concern for us that the decline might be bigger. The guidance provided by PZC is for 18-23% decline in Group 2018E PBT vs. 2017FY.
There’s actually sales pressure in “Naija”: The management of the Nigerian subsidiary actually confirmed to us in February that the operating environment has been more challenging than expected since December 2017, and could impact the group’s performance in the traditionally strong second half, and indeed, 2018F. The Personal Care (-5% y/y volume in H1) and Electrical (-20% y/y volume in H1) divisions remain under pressure, while Home Care (+7% y/y volume in H1) has been resilient. In essence, the 23% y/y revenue growth in H1-18 was entirely price-driven. Revenue growth should moderate to 8% in H2, by our estimate.
Including on margins: In yesterday’s update, the parent company mentioned that intense competition is resulting in lower prices and margins, but “noticeably in the milk category”. Overall, for us, we should mention that PZN’s gross (24%) and EBIT (3%) margins are currently below their 2013-2016 averages (c.27% and 8% respectively), and, while we see little downside pressure from current levels, we also do not expect them to return to historical levels soon.
But there could be light in the end: In light of the aforementioned, the Group said it has initiated some remedial actions in Nigeria, including a (1) reassessment of the structure of its operating model to further reduce the overhead base, (2) review of product costs with a focus on areas such as packaging reduction, and (3) re-prioritisation of the new product pipeline to focus on fewer, bigger projects requiring lower levels of complexity. Clearly executed, we believe these efficiency measures will be potentially positive for margins.
Valuation: We have a SELL recommendation for PZN (NGN15.19 TP), with YtD return of 12%. On our numbers, PZN is trading at 2018F P/E and EV/EBITDA multiples of 26.7x and 10.5x respectively, relative to MEA peer averages of 22x and 15.6x respectively.