PZ Cussons Q2 2019: Accretion in PBT As Lower Opex/Sales Ratio and FX Gains Offset Weak Margin

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January 10. 2019/InvestmentOne Report

•     Mixed topline performance: up 20.5% q/q; down 15.2% y/y.

•     Lower gross profit margin: down 609bps q/q; 563bps  y/y.

•     Lower opex/sales ratio: down 1064bps q/q; 363bps y/y.

•     A profit before tax of N1.56billion in Q2 2019 against a loss before tax of N204million in Q1 2019 and a profit before tax of N1.05billion in Q2 2018. 

Although PZ Cussons Nigeria Plc’s reported Q2 2019 results showed improvement in PBT margin, the firm continued to find the operating environment challenging as topline performance remained uninspiring.  

Consequently, PZ published a 347bps y/y improvement in PBT margin, largely driven by 363bps y/y reduction in opex/sales ratio, a foreign exchange gain of N143million in Q2 2019 against a foreign exchange loss of N779million in Q2 2018 as well as a net finance income of N44million in Q2 2019 against a net finance cost of N229million in Q2 2018. These combined to more than offset the 563bps y/y contraction in gross profit margin.  

Similar factors that drove performance on a y/y basis supported the Profit Before Tax of N1.56billion recorded in the quarter, as against the Loss Before Tax of N204million in Q1 2019. 

Gross Profit Margin Remained Pressured 

Gross Profit Margin continued to remain lackluster both on a q/q and y/y basis, declining by 609bps and 563bps respectively to 22.4% in Q2 2019. We suspect the contraction in gross profit margin may have been due to input cost pressures coupled with the inability to take price increases as consumer demand remained fragile and competition intensified.  

We believe the shrinkage in gross profit margin as well as lower sales volume in Q2 2019 largely accounted for the 32.2% y/y drop in gross profit in the quarter. 

Moderation in Opex/Sales Ratio 

However, the firm demonstrated resilience in terms of optimizing its operating expenses. This saw opex/sales ratio decline significantly by 363bps y/y and 1064bps q/q to 15.4%.  The improvement in opex/sales ratio was solely supported by the 95.35% q/q and 95.44% y/y reduction in administrative expenses to N88million, which more than outweighed the 27.7% q/q and 21.1% y/y increase in selling, distribution and administrative (SD&A) expenses. The increase in SD&A may have been driven by the need to grow volume amidst fierce competition.  

Consequently, operating margin rose by 455bps q/q but remained depressed y/y, down 200bps, on account of lower gross profit margin. 

Foreign Exchange Gain On Naira Stability 

Furthermore, PZ recorded a foreign exchange gain of N143million in its Q2 2019 financial performance against a foreign exchange loss of N779million in Q2 2018. The foreign exchange gain recorded, the first in recent times, may have been supported by the relative stability of the domestic currency in the FX market. This has been made possible through CBN’s sustained intervention to ensure liquidity and stability in the FX market. We opine this may have reflected in the FX gains reported in the quarter, hence, supporting Q2 2019 performance. 

Cash Flow From Operation Remains a Source of Concern 

Contrary to Q2 2018, PZ’s cash flow from operation during the quarter printed in the negative. Although operating cash flow before working capital adjustment came in positive, higher by 10.02% y/y to close at N2.80billion, the negative cash balance from operations after working capital adjustment was driven by the increase in inventories and trade receivables. The increase in inventory may be a reflection of lower sales volume recorded in the quarter. 

The negative cash balance recorded in Q2 2019 was similar to what was obtainable in Q1 2019, despite significantly reduced credit sales in Q2 2019 relative to the previous quarter.  

Going forward, we expect election spending and the potential increase in minimum wage to be supportive of consumer spending. This may bode well for the company’s topline performance in the medium to long term. Given the competitiveness in the consumer goods space, we do not expect to see significant price increases especially amidst weak consumer purchasing power. Although, the parent company highlighted the need to review product portfolio to improve company performance, we believe there may still be some pressure on gross profit margin. However, we expect a restructuring of the operating model aimed at reducing overheads and stability in FX to bode well for PBT performance. 

Our pricing models are currently under review. 

PZ Cussons Nigeria Plc Q2 2019/ H1 2019 figures. YE: MAY 31 (N’ millions)

Q2 2019

Q/Q

Y/Y

H1 2019

Y/Y

Sales

19,156

20.5%

 

-15.2%

 

35,052

-14.8%

 

Cost of Sales

-14,861

30.8%

 

-8.5%

 

-26,224

-8.9%

 

Gross Profit

4,295

-5.2%

 

-32.2%

 

8,827

-28.4%

 

Gross margin

22.4%

-609bps

 

-563bps

 

25.2%

-479bps

 

OPEX

-2,959

-28.7%

 

-31.3%

 

-7,106

-15.9%

 

Opex/sales

15.4%

-1064bps

 

-363bps

 

20.3%

-27bps

 

Net Finance cost/income

44

-11.8%

 

119.4%

 

95

-118.9%

 

Foreign exchange gain/loss

143

121.5%

 

118.4%

 

-525

-79.6%

 

PBT

1,555

860.5%

 

48.1%

 

1,350

55.5%

 

PBT margin

8.1%

940bps

 

347bps

 

3.9%

174bps

 

Tax

-129

#DIV/0!

 

-61.7%

 

-129

-53.7%

 

Tax rate

8.3%

830bps

 

-2381bps

 

9.6%

-2257bps

 

PAT

1,426

797.4%

 

100.1%

 

1,221

107.2%

 

PAT margin

7.4%

872.9bps

 

429bps

 

3.5%

205bps

 

Source: Company financials, Investment One Research

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