Equity Report - PZ Cussons Nigeria Plc - Will the pressures abate?
- PZ Cussons Nigeria Plc (PZ) FQ3 19 numbers showed the intensity of ongoing competition across products in the home and personal care segment. Particularly, dish washing liquid “Mama lemon” and “Sunlight” are competing favorably with “Morning Fresh dish wash”. Also, “Tura supreme” which has a better price point and matching appearance with PZ’s “Premier bar soap” further intensified the volume pressure, with PZ booking 13% decline in sales to N55.1 billion over nine-month 2019 financial year. Coupled with sticky input and higher distribution cost, after tax profit came in lower by 39.6% YoY to N807.1 million, with EPS printing at N0.20. For its last quarter in 2019, while we see no change to the tough operating environment, our view of a stable FX environment guides our expectation of a little or no FX losses as seen in a similar period of the prior year – leaving the earnings for full year flat at N1.9 billion (+0.09% YoY) with EPS at N0.49.
- For its 2020 financial year, while we still expect the company’s products to remain threatened as FX remains stable, support for earnings would stem from moderation in petrochemical prices and distribution expenses. For clarity, PZ launched its re-branded dish washing liquid (“Morning fresh”) in the second half of 2018 (i.e the company’s FQ2 19), which we believe necessitated increase in selling & distribution expenses as the company embarked on promotional offers to drive sales. Given the offers were unfruitful in driving sales, which we believe is due to the fact that the product trades at a higher pricing point relative to its peers (“Mama Lemon”, “Sunlight”, “Brite” and “Klean Mate”) we expect PZ to gradually normalize its distribution expenses going forward. That said, coupled with our expectation of tamer production cost, we expect after tax profit to print at N2.1 billion (+26 YoY).
- Notwithstanding the earnings improvement, we believe the stock is expensive at current price. Thus, we have a SELL rating with a revised FVE of N8.71 (previously N10). PZ trades at FY 19E P/E of 20.9x, compared to Bloomberg MENA peer average of 14.8x.
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ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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