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Q1 2016 results review: Fx challenges impact earnings

​Fx challenges impact earnings

• 2016-17E EPS forecast cut by -8.3% on average: PZ Cussons Nigeria (PZ) recorded a PBT decline of -37.3% in Q1 2016. As a result of the PBT coming in -32.8% behind our estimate, we have cut our 2016-17E EPS forecasts by -8.3% on average but limited the cut to our price target to -1.3%. According to management, the volatility and uncertainty in the foreign exchange market took their toll during the quarter. Our new price target of N16.3 implies a potential downside of -32.3% from current levels. PZ shares are trading on a 2016E P/E multiple of 27.6x for 13.6% EPS growth in 2017E. The shares are flattish ytd (vs. -16.1% ytd for the NSE ASI). We maintain our Underperform rating on the stock.

• Marked y/y decline in Q1 PBT: Q1 2016 sales of N15.0bn were flattish y/y, but PBT and PAT declined markedly by -37.3% y/y and -32.1% y/y to N547m and N377m respectively. Although gross margin expanded by 68bps y/y to 27.6%, partly due to inventory on hand, its impact on the bottom line was offset by a significant increase in net finance charges to N165m from an income of N41m in the prior year as well as an opex increase of 7.5% y/y. The 32.1% PAT decline could have been worse but for a -48.4% y/y decline in the tax charge as well as a -41.2% y/y decline in minority interest. Sequentially, sales, PBT and PAT fell by -26.4% q/q, -78.7% q/q and 75.8% q/q respectively. We attribute the trend to seasonality effects as Q4 is typically the strongest quarter for PZ, although 2014 was an exception.

• Near term outlook not promising: In addition to the prevailing macro headwinds and increased competition which have adversely affected PZ's operations over the last couple of quarters, more recently, PZ Cussons UK, its parent, stated that the tightening of foreign currency rules in Nigeria is restricting dollar availability for certain items including crude palm oil (CPO). CPO is a major raw material for PZ's Home and Personal Care segment. At present, PZ is making alternative plans for sourcing dollars. We expect fx pressures to continue to weigh on raw material costs in the near term, especially as the PZ WIlmar joint venture is unlikely to supply PZ with meaningful quantities of palm oil for some years. As such, we estimate a -15.1% y/y decline in PBT in 2016E.