October 15, 2020
by FBNQuest Research
Material increases to earnings estimates
We have raised our price target on PZ Cussons Nigeria (PZ) by 32% to N5.4 on the back of its latest results, which exceeded expectations. Q1 2020 (end-August) earnings indicate a sharp recovery from the lockdown that hit the company hard in Q4 2020. Sales improved by 53% q/q while PBT (adjusted for a one-off fx loss of -N1.1bn) of N840m compares with a pretax loss of -N4.0bn in Q4. Adjusted PBT for the quarter was also well above Q1 2020 pretax loss of -N1.0bn and our forecast of -N170m.
The results suggest that improved volumes largely drove the strong performance in Q1. Indeed, y/y sales growth of 18% in the quarter was the fastest since Q2 2018. Although macroeconomic headwinds are likely to persist beyond Q1, we expect the recovery in PZ’s earnings to be sustained over 2021E. In particular, we see favourable base effects from the branded consumer goods segment which posted double-digit sales declines in the prior two financial years.
We have therefore modelled positive earnings over subsequent quarters in contrast to pretax losses in their corresponding quarters in 2020. Our new PBT forecast of N895m for 2021E compares with previous loss forecast of -N878m and -N8.0bn posted for FY 2020. We also adjust our 2022-23E EPS forecasts upwards by an average of 35%. Year-to-date, PZ shares have sold off by -26% versus the broad market index which is up 6%.
Our new target implies an upside potential of 28%. Considering this upside potential and an improved earnings outlook over the near-to-medium term, we have upgraded our rating for the stock to Neutral.
Q1 2021 adjusted PBT driven by sales growth
Sales increased by 18% y/y, driving a gross margin expansion of 899bps y/y to 26.2%. Opex was up 11% y/y but this was not strong enough to offset the positive topline. However, earnings were eroded by an fx loss of -N1.1bn. As such, a pretax loss of -N212m was reported, though this was an improvement from a Q1 2020 pretax loss of -N1.1bn. Adjusting for the fx loss implies a PBT N840m.
On a sequential basis, sales were 53% higher q/q while gross margin expanded by 2,481bps q/q. Adjusted PBT for the quarter compares with a N3.2bn adjusted loss posted in Q4 2020. Relative to our forecasts, the adjusted PBT was well above our loss forecast of -N170m, largely driven by a 13% positive surprise in sales.