Last year, PZ Cussons declared a new mantra of its new strategy for sustainable profitable growth which is Building brands for life… for today and for future generations. The aptly coined mantra reflects its enviable 120-year heritage as one of the oldest companies to operate in Nigeria.
The mantra also hopes to address the more recent challenge of returning to sustainable profitability and breaking from a habit of losses. The company has most recently been synonymous with reporting losses in the first Q1 of its financial year, at least since 2016. This trend however stopped last year.
The company released its first quarter results for the period ending August 2022 where it indicated revenue increased by 23% to N27.392 billion from N22.204 billion in the prior period of 2021. Profit after tax also grew by 464% to N1.303 billion from N231 million in Q1 2021/22 as it recorded back-to-back profits for the first quarter of its financial year.
A closer look at the path to profitability however reveals a rather familiar pattern. As it were in the prior year, profits got a boost from other income and not its mainstay of a combination of Home & Personal Care and Durable appliance businesses.
Just like in 2021/22FY, where the group moved out of a loss position due to revenue from “other income” derived from the disposal of assets, the swing in profits in Q1 2022/23 to the N1 billion mark, the highest in over 5 years, is on the back of high-interest income from interest received. The company did not provide notes breaking down components of its interest income.
Stripping interest income of N650 million, the company still reported a profit but at very slim margins. For example, gross profit was 22% this quarter compared to 26% same quarter last year. Operating profit was N734 million about 2.6% of sales.
What is clear is that PZ Cussons is not generating enough revenue to offset rising operating costs and overheads, mostly due to high shipping and logistics costs, port congestion, and several other factors. In its final year results for the period ended May 2022 (released just this week) profits were also boosted by the sale of property in Ikoyi.
The company’s survival is currently hinged on its strong balance sheet which is free of external debts but loaded with related party borrowings akin to a bailout. The company carries a related part payable of N39 billion and also obtained a fresh “non-interest bearing loan” of $40.26 million which when combined gives the company a large cash pile of N53.4 billion which in reality is owned by the majority shareholders.
Whilst it is yet to explain why it borrowed again from its related party, we believe the forex loan was required to help support its forex needs amidst the scarcity experienced in the country. Apart from owning about 73.2% of the shares of PZ Cussons Nigeria, its parent company’s N53.4 billion receivable from its subsidiary is more than the company’s net asset of N39 billion.
The parent company already controls the affairs of the subsidiary so no surprises intercompany loans are interest-free. The loan is, therefore, not a free lunch so we expected the parent company dangles a card very soon. A likely source of repayment might be via a right issue or public offer which will dilute minority shareholders if it does, paving the way for a delisting.
Whichever method it seeks, it will get and we believe this could be the play eventually. From bailout to buyout?
Prior to the release of Q1 2022/23 earnings results (June 1 – August 30, 2022), PZ Cusson’s share price lost N3.45 (From N11.50 to N8.05 per share) due to deteriorating investors’ sentiment.
But by the close of trading on Monday, October 17th, 2022, it had moved to N9.20 per share, recording a 9.5% gain over its previous closing price of N8.40. Overall, it has a 50.8% year-to-date gain, having started the year with a share price of N6.10, ranking it 15th on the NGX in terms of year-to-date performance. These are all signs of a stock primed for a scramble.
Suffice it to add it is paying out N4 billion from its full-year profits much of which is coming from the proceeds of the disposal of fixed assets. These are signs that make PZ Cussons a stock to watch.
