PZ Cussons Nigeria Plc: FX losses to moderate in FY’19

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  • FY’18 revenue falls below Vetiva estimate, albeit up 3% y/y
  • FY’18 PAT declines 48% y/y as FX losses continue to weigh
  • Board proposes 15kobo/share dividend (FY’17: 50kobo/share)
  • Expect some earnings recovery from FY’19

Weakest Q4 revenue in over a decade drives underperformance

PZ Cussons Plc (PZ) recently released its FY’18 financial results (for the period ended 31 May 2018) showing a modest 3% y/y revenue growth to ₦80.6 billion, while profit after tax recorded a disappointing 48% y/y decline to ₦1.9 billion (Vetiva: ₦2.2 billion), its lowest level in recent history. Revenue for the year came in 5% below our estimate following disappointing figures in the typically stronger Q4 period. Notably, Q4’18 revenue came in 23% lower y/y and at the lowest level since 2007 at ₦17.3 billion. According to management, the peak-season flop was due to sustained weakness in consumer sentiment across most of its categories. Looking at the major business segments, Electricals recorded a third consecutive year of revenue decline, down 6% y/y amidst reduced consumer spend. Meanwhile, PZ’s Branded Consumer Products segment recorded a 6% y/y revenue growth, supported by new product launches and growth in Morning Fresh.

Profit drops to lowest level in recent times, lags Vetiva’s estimate

In line with the trend recorded in the past two years, the company’s bottom line remained subdued by substantial foreign exchange losses, trimming 65% off operating profit within the period (₦5.4 billion, Vetiva: ₦4.0 billion). Given that these FX losses have been a result of exchange rate differentials, PZ’s parent company has stated that all US Dollar denominated balances will now be translated at the NIFEX rate (previously CBN rate) given that this rate is where the majority of its transactions are settled. With this development, we expect FX losses to moderate substantially going forward barring any unforeseen currency devaluation.

Away from this, PZ’s earnings were also hampered by cost escalation in the period. Notably, gross margin contracted by 537bps y/y to 30% – a result of higher raw material costs that have not been passed on to consumers.

Furthermore, PZ also recorded a 10% y/y rise in operating expenses – particularly driven by higher personnel costs. Driven by these, PZ recorded a 38% y/y decline in FY’18 EBIT to ₦8.2 billion (Vetiva: ₦7.7 billion).

FY’19 Earnings estimates little changed

Though PZ’s Q4 revenue performance is quite discouraging, we forecast a modest 4% y/y revenue growth in FY’19 with most of the improvement happening in the latter part of PZ’s financial year, amidst the expected increase in spending during the election period. We, however, forecast a significant rise in FY’19 bottom line to ₦4.9 billion (Previous: ₦4.8 billion) driven by a sizable reduction in foreign exchange losses to FY’19E: ₦2.0 billion (FY’18: ₦5.4 billion). Overall, we forecast a modest improvement in FY’19 EBIT margin to 11.0% (FY’18: 10.4%). All in all, our 12-Month Target Price for PZ is revised lower to ₦23.79 (Previous: ₦24.37), BUY.

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