PZ Cussons Nigeria Plc: 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 ₦205 million loss after tax to start the year
  • Earnings estimates revised lower following the Q1’18/19 flop

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

PZ Cussons released its Q1’18/19 financial statements showing a 14% y/y moderation in revenue to ₦15.9 billion (Vetiva estimate: ₦17.5 billion) and beginning the year with a ₦205 million loss after tax (Vetiva estimate: ₦1.0 billion PAT). Revenue for the quarter came in as the lowest Q1 performance in three years and 9% below our estimate amidst sustained difficult trading conditions according to the company. Though Management has alluded to the implementation of innovative marketing strategies to strong growth for the past three quarters, recent performances are yet to show any benefits from these plans. Whilst we understand that tighter disposable income has subdued sales in PZ’s Electricals segment, the tepid performance across home and personal care products are quite unimpressive given the stronger turnover trend observed across its competitors. We believe a mix of intense competition, slow response to market developments and seemingly weaker brand equity on its HPC products have contributed to 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 our expectation and the prior year respectively amid sustained margin volatility. Gross margin came in at 29%, lower than our 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 ₦385 million, significantly behind our ₦1.9 billion estimates and the lowest figure recorded since Q4’13. However, foreign exchange losses moderated 63% y/y to ₦668 million, albeit still above our ₦420 million estimates. Overall, the bottom line for the quarter came in negative at ₦205 million, marginally higher than the ₦123 million loss recorded in Q1’17/18.

Bearish on sales capacity for FY’18/19

We revise our FY’18/19 revenue estimate 10% lower to ₦75.1 billion (FY’17/18: ₦80.6 billion) as reduced product prices and a lower volume rollout weigh on the top line figure. Whilst we have left our gross margin estimate for the year unchanged, we revise our OPEX to sales ratio 200bps higher following the Q1’18/19 surprise. As such, we forecast a 22% y/y decline in operating profit for the year to ₦6.4 billion (Previous: ₦9.2 billion). Meanwhile, having revised our FX losses higher to ₦2.5 billion (₦2.0 billion), our FY’18/19 PAT forecast is revised sizably lower to ₦2.6 billion (Previous: ₦4.9 billion, FY’17/18: ₦1.9 billion). Following this, our 12-Month Target Price of PZ is revised lower to ₦20.15 (Previous: ₦23.79). Despite the unappealing earnings results for the financial year, the stock remains a BUY
at the current market price of ₦12.55.

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