PZ Cussons Nigeria Plc. (3 months ended August 2014)
Weakness in HPC segment continues to underpin subdued revenue trajectory
- PZ Cussons Nigeria Plc (PZ) released unaudited results for 3 months ended August 2014 wherein revenues were flat (-0.3%) YoY at N15.01 billion—3% behind our forecasts. In its recently released trading update, PZ noted that whilst its electricals business extended its positive growth trend during the quarter, disruptions to trade in the north continued to adversely impact revenues—suggesting Home and Personal Care (HPC) segment (~70% of sales) continues to remain under pressure. In recent years, PZ has experienced a slack pattern in revenue (2009-2013 CAGR: +2.6%) which hints at other issues beyond security woes—such as heightened competition from cheaper imports—with days sales outstanding extending the rising trend suggesting continual struggles with volume growth.
Benign crude oil prices drive gross margin expansion
- FQ1 15 COGS declined faster than revenues (-1% YoY to N10.9 billion) resulting in gross profits rising 1.7% YoY to N4.04 billion (FQ1 15E: N4.16 billion). The tamer input costs possibly reflects subdued trend over the reporting period in key petrochemical inputs for its HPC segment as Brent crude prices tracked lower (-6%). Consequently, gross margins expanded 50bps YoY to 26.9%.
Nevertheless, rising S&D costs erode input cost gains
- In line with trends across our Consumer coverage universe, FQ1 15 operating expenses rose 9% YoY toN3.2 billion. Although no breakdowns were provided we believe this likely reflects rising selling and distribution costs as with the broader FMCG sector which resulted in opex-to-sales ratio climbing 180bps YoY to 21.4% as against 18.7% implied our forecasts (eight quarter trailing average: 17.3%). In its FY 14 results commentary, PZ’s management hinted at higher S&D costs in response to higher levels of promotions and marketing expenses by competitors in the HPC space. Aided by a 79% YoY contraction in other operating income to N8.5 million, FQ1 15 EBIT declined 21.9% YoY to N831 million (FQ1 15E:N1.31 billion) with related margins 150bps lower YoY at 5.5%.
Decline in finance income exacerbates earnings pressure
- FQ1 15 finance income dropped 79% YoY to N40.7 million tracking declines in cash balances (-57% YoY to N3.2 billion). The tamer finance income, in addition to the higher opex, underpinned 31% and 30% YoY contraction in FQ1 15 PBT and PAT to N873 million and N642 million, with corresponding margins 260bps and 180bps lower YoY at 5.8% and 4.3% respectively.
Tepid growth outlook and rising S&D costs to underpin downgrade to our recommendation
- The current results reiterates our views about weak top-line outlook for PZ as the key HPC segment remains under pressure. Whilst earnings outlook should be buoyed by recent bearish trajectory in crude oil prices, the prospect of higher S&D costs as PZ seeks to match intensifying competition could dampen pass-through of input cost gains. Reflecting the wider than anticipated expansion route-to-market spending in current results, we see scope for upward revisions to our OPEX estimates which together with our tepid growth expectations suggests scope for further downtrend in our FVE for the stock. PZ trades at a current PE of 28.9x vs. 30.33x for Bloomberg Middle East and Africa peers. Though our last FVE (N35) is at 10% premium to PZ’s last trading price implying a NEUTRAL recommendation, we see sizable scope for ratings downgrade on the back of our expectations for limited top-line growth and higher opex outlay in coming quarters.
