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Initial View - PZ Cussons Nigeria Plc. FQ3 2019 - Lower sales, sticky cost, poor earnings

• The intense cross product competition in the home and personal care (HPC) segment further exerted pressure on PZ Cussons’ operation over its FQ3 19 financial year (to recall, the company’s financial year runs from June to May) results released after the close of market yesterday. The company reported loss after tax of N414.2 million following higher than expected decline in sales (-9.6% YoY to N20 billion), sticky production cost (-0.1% YoY to N16.2 billion) and higher operating expenses (+3.7% YoY to N4.2 billion). The decline in sales was steeper, relative to our expectation of a mild decline (-0.6% YoY) as the second half happens to be its peak season. That said, reflecting the loss in FQ3 19, PZ’s 9M 19 earnings printed at N807.1 million with EPS for the period declining 39.6% YoY to N0.20.
• The parent company in its half year trading update, guided that the Nigeria business will increase focus on optimizing its price points and pack sizes across the key brands and product portfolio, in a bid to leverage the retail end of the market to drive volumes. For us, we believe the persistent competition in the market supported by a favorable FX environment continued to place pressure on the company’s selling price and volumes. To add, while we do not rule out the impact of depressed consumer wallet on sales, we believe the change in consumer taste and preferences in the HPC segment, has also played a major role in worsening the company’s sales. For context, while its flagship product “imperial leather” and few new products recorded a decent performance in the European and Asian countries, trading in Africa has remained unimpressive for the company. Consequently, over the review period, revenue dropped by 9.6% YoY to N20.0 billion.
• Sticky production cost and higher operating costs amplified the loss.  Despite the decline in sales, input cost remained sticky, with cost to sales ratio expanding 770bps YoY to 81%. For us, we believe the flat input cost despite the decline in sales emanated largely from significant disruption being faced in clearing goods at the port. For context, during the review period, prices of the key production inputs, CPO and petrochemical, have decline 8.5% YoY and 7.4% YoY respectively. Overall, gross profit fell 36% YoY to N7.8 billion, with related margin contracting to 19% (FQ3 18: 26.7%).
• Further down, the unsettled supply chain optimization and higher marketing expenses in a bid to increase awareness of its retail focused pack sizes across the key brands, further pressured earnings. Over FQ3 19, the company’s cost to income ratio widened to 21% (FQ3 18: 18.3%), which led to an operating loss of N399.5 million – relative an operating profit of N1.8 billion recorded over FQ3 18.
• Contrary to the prior quarters wherein gains on invested cash provided some support for PBT, the lower cash position of N3.5 billion (H1 19: N6.6 billion, 9M 18: N11.5 billion) over the period coupled with moderation across treasury assets further constrained finance income during the period. For context, finance income during the period came in lower at N34 million from N473 million.
• Our last communicated FVE on PZ is N10.93 which translates to a NEUTRAL rating based on last trade price.

 More analysis to follow.

Financial Quarter 2019.