Underperform rating maintained
- EPS forecast trimmed by -13% over the 2018-2020E period: PZ Cussons Nigeria (PZ) posted a Q3 2018 (end-Feb) earnings decline of -64% y/y to N668m. The drivers were weaker-than-expected sales, gross margin contraction and fx-related losses. All business segments experienced topline weakness during the quarter. Following correspondence with management, we do not expect Q4 (end May) results to improve vastly. According to management, unit volume growth which was flattish y/y in Q3 is anticipated to remain unchanged during the last quarter of the year. Tightening liquidity for trade and consumers as well as increased competition from imports are largely to blame. We understand that naira credit availability which was tight in 9M 2018 (end Feb) is likely to persist through the year. Therefore, we have cut our sales forecast for 2018E by -13% to N83.5bn. On the bright side, we are now more optimistic about PZ’s white goods segment which appears primed to benefit from weakening disposable income due to its relative affordability. Our channel checks, which was confirmed by management, reveal that the firm’s new energy saving fridges and freezers have had a very good response from consumers. PZ posted fx-related losses of –N705m, with management guiding to a similar magnitude in Q4. The assumption here is that fx rates and purchases through the central bank and I&E window will remain stable. On the back of these views, we have cut our EPS estimate over the 2018-2020E period by -13%. Our new price target of N19.1 is down 7% and implies a downside potential of -17% from current levels. We retain our Underperform rating on the stock. PZ shares are trading on a 2018E P/E multiple of 21.5x for average EPS growth of 26% y/y over the 2019-2021E period.
- Q3 2018 PBT declined -61% y/y to N1.1bn: In Q3 2018 (end-Feb) results, while sales of N22.1bn fell by -7% y/y, the decline in PBT and PAT was more significant. PBT and PAT declined by -61% y/y and -64% y/y respectively. Positives coming through from relatively lower net finance charges and forex-related losses were completely offset by the topline decline and a -583bps y/y contraction in gross margin to 26.7%. Sequentially, while sales came in flattish q/q, PBT and PAT were both up by around 5% q/q. Compared with our estimates, sales and PBT both missed by -23% and -64% respectively. On an annualised basis, 9M 2018 PBT is tracking well behind consensus FY 2018 estimate of N6.9bn.