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Blurb

PZ Cussons and its sticky pattern of losses

There is a familiar pattern that has reared its head every first quarter, since at least 2016 at PZ Cussons and it’s getting us puzzled

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PZ Cussons Nigeria Plc Full-year 2019. PZ Cussons’ revenue declines by 0.55%  

There is a familiar pattern that has reared its head every first quartersince at least 2016 at PZ Cussons and it’s getting us puzzled. Every end of August, its first quarter of the year, this consumer goods company reports a pre-tax loss.  

In 2016, when we started tracking, the loss was N2.4 billion, a year later it crashed to N181 million but there was still a lossand then another loss of N205 millioa year later. This August, it stayed with the trend, reporting a loss before tax of N1 billion, the highest since 2016. So why these losses? 

PZ Cussons is a consumer goods company that sells household products to millions of Nigerians. Its main products include home and personal care products such as Morning Fresh, Imperial Leather, Cussons Baby, Robb etc. It also sells durable electrical appliances such as HaieThermocool refrigerators, televisions, gen sets, aiconditionersetc.  

At the end of its financial year ended May 2019, it reported sales of N74.3 billion, with the Home Appliances segment making up about N47.2 billion of the amount. Despite its pattern of reporting first quarter losses, the company has also reported profits, at least since 2015. The profits have however crashed from N4 billion in 2015 to just over N1 billion this year.  

First Quarter losses: A cursory review of the company’s results indicates that two main factors contribute to its first quarter losses every year: 

  • Foreign Exchange Loss – In some quarters where it reported losses, it was mostly as a result of loss on foreign exchange transactions. For example, in 2018 it reported a loss of N668.3 million which wiped out its operating profits. 
  • Cost of sales – In other years, it was its cost of sales that contributed to the losses. This year, cost of sales was about 83% of revenues (17% gross margins), leaving little to no room for selling and administrative expenses to eke out a profit. 
  • As a matter of fact, in years (first quarterto be precise) where foreign exchange was a reason for the losses, gross profit margin waover 30%, while in years where it was cost of salesgross profit margin was under 30%. 2019 marked the first time that it was under 20%. 
  • Suffice to add that PZ Cussons does not have external debts and only owes taxes and its suppliers. It also has a healthy cash balance of over N2 billion. 

Could this be deliberate? Digging into the financial statement of the company did not reveal much. For some reason, perhaps conveniently, the company did not provide notes breaking down components of its cost of salesneither did it break down its foreign exchange losses. Actions like these often lead investors to suspect foul play.  

On a flip side, it could be due to some seasonal reasons where costs are typically higher this time of the yearcompared to others. However, this is merely conjecture as the company did not reveal same in its financial statements.  

Financial authorities have often raised issues with transfer pricing, a situation where companies within the same group transact with each other and determine how cost between themselves will be accounted for. It is interesting to note that out of the N62 billion in the reported bought in materials and services, N45.6 billion were imported. This is according to the Value Added Statement in its financial year ended May 2019. 

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The company boldly mentions in its annual report that it “is not prepared under IFRS,” but under CAMA, whatever that means. 

Why this matters: Quarterly results help a discerning investor know exactly when to buy a stock. For investors who know that the company typically makes up for its first quarter losses in other quarters, timing the stock is essential. Unfortunately, an analysis of the company’s share price history reveals that the stock hardly reacts in any familiar pattern when it announces its results.  

Nevertheless, its share price has fallen from about N30 plus in 2015 to N7, as at close of business Monday September 30th. As low as the price is, it is considered expensive at over 144x its earning per share. But these issues matter the most for these reasons: 

  • Shareholders should be worried about the pattern of losses reported every first quarter and should demand answers from the company. 
  • The company should provide a detailed note to account for its cost of sales to enable investors better analyse its components.  
  • Financial authorities, such as the FRCN, need to also take a closer look at results of most entities with significant foreign ownership to ensure that value is retained in the business for minority shareholders.  

PZ Cussons is a conglomerate and is owned majorly by PZ Cussons UK with a 73.2% stake. Even though its revenue has remained flat at about N73 billion over the last 5 years, its earnings per share has tanked from N1 to about 25 kobo.  

The "Blurb Team" is the official conveyer of the opinions of the Nairametrics Research & Analysis Board on matters of financial reports, macroeconomic data, and economic policies.

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    Blurb

    Dangote Sugar records revenue boost despite inflation and Apapa gridlock

    Dangote Sugar has revealed it increased prices in the first quarter of 2021 to mitigate the problems of rising inflation and depreciation.

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    Dangote Sugar proposes N18.2 billion as final dividend for 2020

    One of Nigeria’s largest Sugar manufacturers, Dangote Sugar revealed it increased prices in the first quarter of 2021 to mitigate the problems of rising inflation and depreciation.

    In a note to investors, the company revealed its recent 41.5% surge in revenues was due to an increase in sales volume as well as an uptick in price. In the first quarter of 2021, Dangote Sugar posted a revenue of N67.39 billion compared to N47.6 billion, the same period in 2020. The increase in price was driven by 5.7% pop in sales volume as the company sold 200,510 tonnes of sugar in the quarter compared to 189, 724 the same period in 2020.

    But while sales value surged by 41.5%, volumes only rose 5.7% suggesting that price increase was a catalyst for the growth in revenue and the company alluded to this in its statement.

    READ: Dangote set to earn N13 billion in dividend from his sugar business

    Dangote Sugar’s performance

    “Group sales volume increased in the quarter by 5.7% to 200,510 tonnes (2020: 189,724 tonnes). Growth continued to benefit from the sustained efforts to drive customer base expansion, several trade initiatives and investments. Group production volume also increased by 4.3% to 200,783 tonnes (2020: 192,584 tonnes) due to our operations optimization strategy despite the challenges of the Apapa traffic situation. Group revenue increased by 41.5% to N67.39 billion (2020: N47.64 billion). Growth in revenue advanced ahead of volume growth due to pricing benefits. Gross profit increased by 41.8% to N18.04 billion (2020: N12.72 billion) on account of better topline performance. EBITDA increased by 34.7% to N17.02 billion (2020: N12.64 billion) on account of increased earnings. Group profit after taxation for the period increased by 30.3% to N8.30 billion (2020: N6.37 billion) reflecting management’s unrelenting drive to deliver consistent shareholder value.”

    The company also explained it had no choice but to increase prices because of the impact of the 2020 devaluation, higher inflationary environment, port congestion issues and a rise in global sugar prices. The company imports raw sugar from Brazil, under the government’s backward integration plan.

    “We have continued to witness high cost of raw materials, energy costs and other input costs due to rising inflation and FX rate fluctuation. Further cost escalation is anticipated in the year as inflationary pressure mounts,” the company said.

    READ: Dangote Sugar yearly revenue surge by 33%, announces a dividend of N1.50

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    Dangote vs BUA Sugar Scarcity Controversy

    Just last month, the company’s adversary and competitor BUA Group accused Dangote Sugar of conniving with Flour Mills of Nigeria (FMN) in price-fixing and arbitrary collusion to create sugar scarcity and keep the price of the commodity high.

    This triggered Dangote Sugar and FMN into issuing a joint press statement denying the accusations.

    The allegation made by BUA was triggered by a joint letter written by John Coumantaros of FMN Plc and Aliko Dangote of Dangote Industries Limited, reporting key developments in the Nigerian Sugar Industry to the Minister of Industry Trade and Investment, Niyi Adebayo.

    The duo in the letter dated January 28, 2021, pointed out how BUA’s new sugar refinery in Port Harcourt may lead to a spike above the import quota as stipulated in the National Sugar Master Plan (NSMP), and how BUA’s investment in the sugar industry via the new refinery is non-compliant to the undertakings under its Backward Integration Programme, in line with local production.

    READ: Dangote’s stakes in his sugar enterprise has earned him N90 billion in 365 days

    BUA’s response however led to an immediate reply by the duo of Dangote Sugar and Flour Mills of Nigeria.

    “In line with this, the Dangote Sugar Refinery wishes to vehemently refute the allegations and assertions made by BUA Sugar Refinery as they are not only false but defamatory, malicious and libellous, as they were geared at tarnishing the good name and brand of Dangote Sugar Refinery Plc and Dangote Industries Limited.”

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    The Group Managing Director, Mr Ravindra Singhvi, explained that the Dangote Group is socially responsible and considers price-fixing to be unethical and disastrous to the nation’s economy, and as such, the allegations made by BUA is highly mischievous and defamatory and should be considered a malicious attempt to smear the reputation of DSR.

    “DSR does not engage in artificial price manipulation of its products, either during the Holy month of Ramadan or at any other time. We have never ever increased the price of our food items or commodities during the Holy month of Ramadan in the history of our operations,” Ravindra Singhvi said.

    Outlook for Dangote Sugar

    Despite the operational headwinds, the company insist it is on track to improve its operations and seek growth in its sugar sales volumes. It also recently received approval from the government to revise its local sugar production targets to 550,000 metric tonnes annually from over 1 million metric tonnes annually.

    “Despite these uncertainties, achievement of our Sugar for Nigeria Backward Integration Project goal remains a key priority, though we anticipate increase in cost to completion in Naira-terms and some delays in Letter of Credit establishment for the importation of plant and equipment. The focus is to achieve the Federal Government’s revised sugar production target of 550,000 metric tonnes annually by 2024. We remain confident of the huge benefits the Backward Integration Programme would deliver and the positive impacts it will have on the economy.”

    Find out why Dangote Sugar is recommended as a buy in our Stock Select Portfolio Newsletter? Click here.

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    Blurb

    GlaxoSmithKline in big trouble as losses mount

    The results were less than impressive with several key indicators showing a year-on-year decline.

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    GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues.

    GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.

    The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.

    The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.

    READ: GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues

    The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.

    Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.

    The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.

    READ: GlaxoSmithKline Nigeria announces changes in its board

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    The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.

    The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.

    The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.

    READ: Nigerian Breweries posts N7.66bn as Q1 2021 profit, shares gain 2.2%

    Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:

    1. A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
    2. Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.

    In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.

    GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.

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    It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.

    Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.

    Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.

    As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.

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