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PZ Cussons Nigeria Plc FQ1 19 - Sluggish Outlook takes a toll on valuation

• PZ Cussons Nigeria (PZ) reported loss after tax of N204 million in its FQ1 19 numbers (FQ1 18: Loss after tax of N123 million).  The dismal performance stemmed from weakness in its business operation, as the company reported a slump in revenue (-15.9% YoY to N9 billion), slower decline in cost of sales (-12% YoY to N11.4 billion) which combined led operating margin to contract 738bps to 2.4%. We highlight the positive of a 62.7% YoY decline in foreign exchange losses to N668 million.
• For the rest of FY 19, we expect the company to return to profit based on our expectation of sturdier revenues in subsequent quarters, as the company enters its peak seasons. However, overall FY 19 should come in weaker than the prior year, as we expect the company to continue to face volume pressures from weak consumer wallets and imported competition. Thus, we forecast revenue of N9 billion (-7% YoY). Additionally, we believe the company’s product portfolio lacks sufficient products that are strong leaders in their category and thus see new exciting product innovations as an upside to revenue. Elsewhere, despite lower Crude Palm Oil (CPO) and stable foreign exchange, we forecast cost of sales to fall slower by 5.2% YoY due to rising Brent Crude price (+50.4% YoY) which should translate into higher petrochemical prices for the company and pressure cost of sales.
• Overall, we forecast FY 19 earnings at N95 billion, translating to an EPS of N0.49 (+1.3% YoY). Over our forecast horizon, we have cut our EPS forecast by an average of 22% owing to the slow recovery in topline. We have a FVE of N10.12 (previous: N16.57) which translates to a SELL rating based on PZ last trade price.