PZ Cussons Nigeria Plc: Earnings to Recover After a Bumpy Start to 2018

5/10/2017/Cordros Research

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Guidance from our recent discussion with the management of PZ is for flat to slight earnings growth in 2018F. The consumer environment is expected to remain challenging and competition intense. Outlook for prices is dovish (there has been a marginal price cut this year for Electrical goods, wherein increase was higher last year), yet volumes are unlikely to recover strongly. Dollar liquidity has improved, outlook is positive, and likewise, the expected impact on business performance.

From the loss in Q1 (discussed in our first glance released on Tuesday), we expect PZ will return to profit in the coming quarters, and close 2018F with N3.52 billion net profit (vs. N3.69 billion in 2017FY). The assumptions driving our forecast are (1) continued revenue growth, (2) modest margin recovery, and (3) higher opex (ratio of revenue to increase by 70 bps) and effective tax rate (to increase by 448 bps). After contracting in 2018F, we expect earnings to grow from 2019F and reach the N5 billion mark (last attained in 2014FY) in 2021F.

Latest economic data (rising PMI, consumer confidence, and business expectation) suggest that the pressure that Nigerian consumers face may be over-exaggerated. With prices largely stable and economic activities improving, we think consumers are actually better-off now, compared to a year ago. For PZ, we expect earlier recovery in the Home Care division (volume was down by only 3% in 2017FY), given the essential nature and affordability of products in that category. A number of initiatives, including distribution expansion and new product launches, will hasten recovery in the Personal Care division (where volume was down by 15% in 2017FY). Although recovery in the Electrical division is expected to lag the others, both the price cut and improved dollar liquidity are expected to impact positively on sales. For hindsight, the 16% q/q contraction in PZ’s Q1-18 revenue is by far less than the 37% average q/q decline recorded during the same period, since 2012 (within available data).

We think the 24% gross margin guidance given by management, consistent with our forecast, is attainable. We refer to subdued pressure from the external environment (as relates to forex) and internal efficiency measures derivable from the recently launched SAP project as enabling drivers. That said, margin recovery will remain modest even after 2018F on continued consumers sensitivity to price points.

The stock has accumulated 67% YtD, supported by the same positive investor sentiment that has driven both the broader and consumer goods indices up by 31.6% and 28.3% respectively YtD. Following the upward review of our estimates, we have increased our 2018F TP slightly higher to N14.86 (previously N14.26). While we remain constructive of PZ, we believe the stock has outrun the level supportive of its fundamentals. SELL.

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