PZ Nigeria:Market sentiment minimises analysts’ cautious outlook

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By Emeka Anaeto

ONE month after PZ Cussons Nigeria Plc announced  its financial results which clearly show a less optimistic outlook, investors’ sentiment has returned positive with cumulative value depreciation coming down to -1.85%.

Investors had reacted adversely to the results with a bear run crashing the price -25% to N10.70 from the pre-result level of N14.25.

Though analysts had recommended a SELL for the stock at target price of N10.41, the share price did not decline to that point; instead it rebounded last week after the initial drop.

Many investors believe the multinational has strong fundamentals to weather the economic headwind which had affected its performance in recent times.

Following the loss after tax suffered at the beginning of the current financial year, PZ’s earnings got a reprieve in the second quarter (September-November 2016) after forex losses associated with cost of goods sold (COGS) reduced significantly (-95% quarter-on-quarter).

PZ’s CEO, Christos Gianopolous

Products price increases

Moreover the company’s products price increases during the period positively impacted revenue (+6% year-on-year), with gross margin reaching record high of 33% over the three months period.

But at the backdrop of this, analysts at Cordros Capital Limited, a Lagos based investment house, still waiver on the outlook for the stock.

They stated: ‘‘Our less optimistic view of PZ, and indeed the Nigerian consumer environment, is unchanged. Importantly, we think the recovery prospect of the HPC (Household Product Category) segment of the consumer goods sector is well behind the Food Products category. Worse still for PZ is that recovery prospect is a lot weaker in the higher margin Household Durables category accounting for 34% of total revenue.’’

According to them the company’s management confirmed to significant decline in volume across the business divisions in the first 2016/17 (HPC -20/30% and Electricals -40%) accompanying the 40/60% increase in prices (taken in phases, via absolute increases and product resizing) during the period.

They further stated: ‘‘Considering the low visibility on the near end to the ongoing strain on consumer purchasing power (particularly in relation to the potential downward adjustment of the Naira exchange rate), we think PZ will struggle to keep up with management’s 10-13% revenue growth forecast over 2017F and 2018F.

‘‘In addition, the possibility of costs doubling from current levels limits the prospect of improvement in margins. Added to exchange rate fluctuation risk, PZ’s input costs face potential pressure from the likely increase in raw materials prices with global commodities prices poised to adjust upwards alongside the rally in crude oil prices and a strengthening  the US Dollar .‘‘This, in essence, is reflective of management’s guidance to 22% sustainable gross margin, 400bps below the long term average.

‘‘On the potential impact of foreign exchange, we note the build-up in payables over the first half (to N41.5 billion, from end-2016 N25.7 billion) on continued US Dollar scarcity.’’

According to the analysts, the company had noted specifically that further devaluation would lead to additional transactional impacts on outstanding US Dollar liabilities and ongoing input costs. The impact on earnings could be a replica of the first quarter (June-August 2016) experience.

On the positive, Cordros Capital analysts noted that a visible success has been achieved with the containment of operating expenses. Growth was 2% in 2016FY and was only 1% in first half 2016/17.

However, the analysts still stated: ‘‘PZ will need to improve top-line growth for earnings to fully benefit from the seemingly stable OPEX (Operating Expenses).’’

The proportion of OPEX to revenue has increased consistently since 2010 (15.2%), reaching 21% as at end-November 2016.

But analysts at ARM Investments Limited, another Lagos based investment house, were more optimistic on PZ’s outlook.

According to them on input costs, recent rally in crude oil prices should translate to higher costs on the company’s petrochemical inputs.

Unaudited financial results

However, they were of the view that in first quarter 2016/17, PZ retained a tight lid on costs, which thus guides our revised OPEX-sales ratio forecast 1percentage points lower to 20% (vs our prior forecast of 21%).

‘‘In the light of these revisions, we revise our rating on the stock to a neutral.’

PZ Financial Results

PZ Cussons Nigeria Plc. (PZ) released its latest unaudited financial results, the second quarter 2016/17 for the period ended November 30, 2016 on January 27, 2017 wherein revenues rose 8.8% year-on-year (YoY) to ¦ 33.3 billion

Though largely reflecting unrealized foreign exchange losses of N4.9 billion, PZ posted pre-tax and post-tax losses of N 425 million and N289 million respectively. Excluding the forex loss reported, PZ would have recognized a PBT of ¦ 4.6 billion (+292% YoY).

In line with trends across big names in the Fast Moving Consumer Goods (FMCG) sector, revenues tracked higher in Q2 ‘17 (+6% YoY to N16.5 billion) which PZ links to impact of higher pricing across its product lines. Given depressed real consumer incomes, PZ’s parent company noted in its commentary that the price review was negative for volumes.

Assisted by tamer petrochemical input prices, gross margin expanded 8% YoY to 34.4%, with gross profit rising 5.6% YoY to N5.8 billion. Similar to companies operating in the FMCG space, PZ reported a cut back on OPEX with corresponding OPEX-to-sales ratio declining 15 percentage points YoY to 21.4%.

Long standing trade payables

Further down, PZ booked a lower forex loss on its trade payables of N237.2 million (Q1‘17: N4.7 billion) which reflects the high Q1‘17 base when the company took charges on long standing trade payables following the 43% Naira depreciation in the period.

Largely reflecting the benign movements in the exchange rate, PZ reported PBT and PAT of N2 billion and N1.3 billion respectively in Q2‘17 (vs. pre-tax and post-tax losses of N1.5 billion and N1.7 billion in Q2‘16).

Ahead of the fiscal year 2017, the company’s management indicated a further upward product pricing and size adjustments to capture actual forex sourcing costs and future replacement costs.

Industry observers believe that given the price-sensitive nature of HPC segment and weak consumer real incomes (first half 2016: -14% YoY), the strategy should result in volume contraction.

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