EUR 3.48 For Business Accounts Only

PZ Cussons FQ2 18- Fundamentally speaking, valuation is rich

• PZ’s six-months 2018 earnings performance was weak on many fronts. True, revenue was higher 24% YoY to N41.1 billion, but that was driven by higher YoY prices across its key products. In the review period, gross margin contracted sharply by 45bps to 30% from 35% in 6M 17 largely on the back of subsisting cost pressures (+32% YoY) arising from higher crude oil prices and exchange rate. The foregoing alongside higher admin expenses drove a contraction in operating profit (-10.7% YoY to N3.8 billion). Irrespective, slower foreign exchange losses in the period of N2.6 billion (relative to N4.9 billion in 6M 2017), supported PBT of N868 million (6M 17: pre-tax loss of N429 million) – EPS: N0.15.

• Isolating the Q2 18 standalone result also reveals a weak earnings picture with EPS declining 45% YoY to N0.18. Despite posting higher revenue (34% YoY) largely underpinned by higher prices, input cost pressures and foreign exchange loss (net short FCY position from trade payables) weighed on top-line performance to neuter earnings.
• We have lowered our estimates for PZ as we plug in recent results and our expectations of higher costs and slower sales growth. For FY 18, we still hold the view that margins will be subdued due to the impact of depressed real income levels, intense industry competition as well as weaker sales from the electricals segment. However, lower FX losses relative to 2017, should drive stronger earnings performance in the current financial year. Overall, the stock continues to feel richly values relative to its peers (MENA) trading a forward P/E of 25x relative to peers of 19.05x. Thus, we retain our SELL rating on the stock.