Earnings Review: Pz Cussons Increase 9Months Pat By 200% To N2.9B

PZ Nigeria Plc released its 9months to 2013 unaudited financial statements with revenue nearly flat at N51.5billion (2011: N51.8billion). Gross Profit at the end of the period was N12.8billion up 12% from the same period last year. Pre-tax profits at the end of the 9months to March 2013 was N3.9billion (2011: N2.3billion).

PZ Operational Overview

PZ Cussons is very well known in Nigerian and has been in operations for decades selling the likes of Robb, Morning fresh, Cussons baby products etc. In the last few years the company has been struggling with dwindling revenue growth and high operating cost. Their parent company PZ Cussons Worldwide (which owns 69% of PZ Nigeria) noted this in the 2012 Audited Accounts claiming that the January 2012 strikes and unrest in the north affected the groups growth prospects. Africa contributed about 42% (£362million or N90.5billion) of PZ worldwide revenues, second only next to Europe. Thus Nigeria effectively contributed about 24% in Global revenues making the country an integral part of its global push for growth.

Result Overview

The fast moving consumer goods market (FMCG) is a highly competitive industry often facing flat revenues and increasing operational cost. To keep afloat, will involves a robust attempt at cost cutting and delivering products that consumers find important and willing to pay for. PZ also operates in the WhiteGoods Household (Home Appliances) sector very well represented by Haer Thermocool products. In 2012, their branded consumer goods segment constituted about 71% of revenues up 13.6% from the prior year. Revenues from Home Appliances however, remained flat growing just 4% year on year. Giving this backdrop, 2013 may well be a more challenging year for the company in terms of top line growth considering revenues remained flat year on year at the end of March 2013. However, cost of sale seemed to have dropped 4% and operating expenses flat both helping the company increase its operating profit by a commendable 73% to N3.8billion. This has helped operating profit margin increase to 7.5% and inevitably more than doubling pre-tax profits margin.

Its probably too early to celebrate but this result gives one a sense of direction at reigning down on cost. Revenue might probably also not get anywhere close to meeting 2012 five year high of N72billion. But if cost is kept low (no debt) then earnings will surely beat 2012’s disappointing result. Whether they can keep Gross Profit Margins to around 20% by year ends will be key.

Share Price Valuation

PZ Cussons rose highest in February 12, 2013 N44.48 and dropped to N35 on April 8. Today (19/4/2013) it traded for N42 up 7% on release of this result. The current P.E ratio is a high 69X and Price to book ratio 4.07. The two valuation metrics is enough to conclude its an expensive stock. Nothing in the valuations justifies this type of premiums on their earnings. Last year’s ROE was just 6% and based on the current result increased to 6.6%, factor in inflation at thats a negative returns already. As it is, April 2012 may have been the best time to buy this stock.