PZ Nigeria Plc released its 2016 first quarter results for the period ending August 31, 2016. The company reported an interim pre-tax loss of about N2.4 billion compared to a pre-tax profit of N547 million in the same quarter last year. PZ has now gone from reporting as high as N1.2 billion in the first quarter of the year to posting a loss.
A cursory look at the results reveal two major issues for PZ. The first is its struggle to maintain revenue growth and get out of its cycle of thin margins. It’s not as if this problem is restricted to PZ only, it is an industry wide challenge. Consumers are cautious with their spending just as operating cost and input cost have galloped due to rising inflation and cost of forex.
This brings us to the next big problem! The company took a massive N4.7 billion exchange loss hit following the floating of the Naira. Though the company did not provide specific notes relating to the loss, it appears the loss may have arisen from the added cost of procuring raw materials.
If this assumption holds true, then we do not see how PZ will come out of its current dilemma without raising prices in future. Higher cost of sales due to implied forex cost is can only be sustained by a commensurate increase in selling prices.
With PZ posting a N2.4 billion loss in the first quarter alone it is even more unlikely that the company will taste profit in the next two years if selling prices are not increased and volumes pick up. PZ reported an operating profit of just N3.2 billion in the whole of its financial year ended May 2016. The current exchange rate loss of N4.7 billion thus creates a massive hole that it likely cannot dig itself out of.
PZ currently trades at a price of N18 and has returned a negative 27% this year. The current share price is at a multiple to last year’s earnings of about 33x. PZ based on simple PE valuation, is highly over valued. There is no growth story that supports such a lofty valuation. However, the company is tightly owned. The company’s Parent company, PZ Holdings own about 73% of the company making it unlikely that the shares could fall further than N15. The company’s 5 year low is about N16 and that was last November.
Investors bullish on a return of foreign investors to the stock market may look in this direction in any event of it touching that price line. Other than that, this stock isn’t worth more than N5.
