Although, revenue growth for PZ Cussons has been weak over the last 5 years (CAGR: 3%) due to a combination of factors the latest set of results provide some scope for optimism that the company is gradually turning the corner.  In recent years, PZ has been beset by a slowdown in consumer discretionary spending and more recently by insecurity issues in its key northern markets. Earnings have also been pressured by stronger commodity prices on its HPC goods segment as oil prices averaged >$100/b in the since 2011.

However, in 6months ended November 2013, PZ announced that revenues rose 5% y/y to N32.4billion with management stating that whilst insecurity still existed, conditions were relatively better than previous leading to increased trading. In addition, management also reported that its palm oil refinery joint venture with Wilmar in Ikorodu continues to expand significantly.  (The plant also turned profitable during the quarter)

Earnings even performed better with PBT and PAT both rising 53% y/y to N3.1billion and N3.97billion respectively. On the back of these results, PZ announced an interim half-year dividend of N0.19 amounting to a pay-out ratio of 54% and a dividend yield of 1%.

These gains emanated from a soft trend in oil prices which drove about 3percentage point expansion in gross margins to 28% in H1 14. Further gains came from financing where PZ reported a net finance income of N224million vs. net finance expenses of N81million in H1 2013.

Although, the insecurity in the north has not abated, there has been no significant escalation in the period since November 2013 suggesting PZ has scope for continued improvement in topline. The outlook for earnings is bolstered by widespread expectations of softer crude oil prices and by extension the petrochemicals used in production of PZ HPC goods.

PZ’s last trading price was N38 per share implying a P/E of 30.9x vs. its local peer Unilever which trades at 36.5x.

PZ’s product portfolio of defensive and discretionary goods positions it to benefit from any cyclicality in consumer incomes, Nigeria’s favourable demographics and middle class expansion. The benign outlook for commodity prices suggests substantial possibility of further earnings expansion. The key risks to this outlook are deterioration in the security conditions in the North which disrupts distribution.

PZ:NL ended the week at N38


Coronation Research


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