We retain our target price for PZ Cussons (PZ NL) of NGN10.50 and our Hold recommendation, despite an ETR of 79%. We will revisit our numbers in light of the weaker-than-expected earnings performance.
Top-line pressure drags on performance. PZ’s earnings weakness continued in FY 19 as PAT fell by 40% yoy to NGN1.2bn, against our expectation of an 18% dip for the year. The decline in the bottom line stemmed from: 1) top-line weakness; and 2) an uptick in costs of goods sold, driven by a sharp rise in Q4 18/19. In line with our projections, PZ’s revenue dipped by 8% yoy, owing to sustained volume pressure in the home and personal care segment, similar to the trend seen at Unilever, as consumers opt for cheaper brands. Notably, though, the white goods segment returned to growth, expanding by 23% yoy. In Q4 19, performance was mixed: the top line expanded by 11% yoy, but net profit contracted 50% yoy.
Maintain Hold, with unchanged TP of NGN10.50. We will revisit our numbers in light of the weaker-than-expected results. Our outlook for PZ’s performance remains weak, as we expect pressure in the HPC segment (63% of revenue) to continue to weigh on performance. Furthermore, the weak market sentiment is expected to continue to weigh on price movements, which could limit margin improvement. The stock trades at PE and EV/EBITDA of 10.8x and 3.5x, respectively, relative to peer averages of 17.6x and 6.5x.
Operating weakness persisted. PZ’s operating performance was as poor as the revenue trend, with EBIT contracting by 73% yoy, even as operating expenses moderated by 9% yoy. The impact of the top-line pressure is more noticeable, as the opex/sales ratio remained relatively flat, at 20%, despite the lower operating expenses. Similarly, margins deteriorated, with gross profit and EBITDA margins falling by 7.4ppts and 6.9ppts yoy, to 23.0% and 6.5%, respectively – relative to Unilever at 31.2% and 22.9%
Net operating cash flow was negative (-NGN9.4bn) due to the weak operating performance and a drop in payables to related parties (down by 24% yoy). Capital expenditure contracted by 41% yoy ande the capex/sales ratio marginally decreased by 1ppt, to 2%.
| FY 19 | FY 18 | yoy % change | Q4 19 | Q4 18 | yoy % change | |
|---|---|---|---|---|---|---|
| Revenue | 74,336.5 | 80,552.8 | -7.7% | 19,266 | 17,293 | 11.4% |
| Cost of goods | (57,235) | (56,097) | 2.0% | (14,802) | (11,074) | 33.7% |
| Gross profit | 17,101 | 24,456 | -30.1% | 4,464 | 6,220 | -28.2% |
| Opex | (14,828) | (16,228) | -8.6% | (3,513) | (3,722) | -5.6% |
| EBITDA | 4,817 | 10,785 | -55.3% | 1469.219 | 3328.823 | -55.9% |
| Net finance income/(cost) | (9) | (652) | -98.6% | (25) | (85) | -71.0% |
| PBT (loss) | 1,942 | 2,314 | -16.0% | 1,006 | 347 | 190.2% |
| Net income (loss) | 1,156 | 1,927 | -40.0% | 349 | 590 | -40.9% |
| EPS (loss) | 0.25 | 0.36 | -29.5% | 0.09 | 0.15 | -39.8% |
| Total assets | 79,937 | 87,074 | -8.2% | 79,937 | 87,074 | -8.2% |
| Total liabilities | 34,184 | 43,507 | -21.4% | 34,184 | 43,507 | -21.4% |
| Total equity | 45,752 | 43,567 | 5.0% | 45,752 | 43,567 | 5.0% |
| Gross profit margin | 23.0% | 30.4% | -7.4% | 23.2% | 36.0% | -12.8% |
| EBITDA margin | 6.5% | 13.4% | -6.9% | 15.0% | 14.5% | 0.5% |
| Opex/sales | 19.9% | 20.1% | -0.2% | 18.2% | 21.5% | -3.3% |