PZ Cussons returns to profitability, analysts plan upgrade to estimates for 2021

PZ Cussons Nigeria Plc returns to profitability in the second quarter (Q2) of financial year 2021 from loss position as earnings rebound following improve fundamentals in spite of tough operating environment.

On account of better than expected earnings results, analysts said they are considering upgrading to the company estimates for 2021.

Analysts at Chapel Hill Denham, however, maintain hold recommendation, sets 12-month price target for PZ Cussons stock at ₦4.06 as against market price of ₦5.35.

In its unaudited H1-2021 results, annualised earnings per share (EPS) improved to ₦0.21 from a loss per share (LPS) of 0.40 in the prior year.

In its equity report on the ticker, analysts at Chapel Hill Denham said this is in line with its forecast of ₦0.24.

The improved EPS was driven by the combined impact of higher revenue that surged 3.0%, 10.9% reduction in cost of sales 75% drop in finance costs in Q2-2021.

A sustained recovery in revenue in Q2-2021, up +3.0% year on year to ₦18.68 billion, lifting H1-2021 revenue to ₦37.38 billion (10.1% year on year).

Chapel Hill Denham said based on the H1-2021 run-rate, PZ’s annualised turnover of ₦74.76 billion is slightly behind 2021 estimate of ₦76.74bn by 2.6%.

“We believe this modest outturn in turnover in Q2-21 was driven by robust growth in volumes and an increase in the prices on selected portfolio products.

“Our view for supportive growth in volumes is due to noticeable volume improvement across the FMCG sector, on the back of the ease in lockdown restrictions and fulfillment of demand backlogs”, analysts said.

Analysts’ market price survey observed significant price increase on some PZ’s HPC products.

For example, Mama Lemon increased +42%, Ariel +97%, and Canoe Soap +118% year on year, except Morning Fresh’s price that was reduced by 10%.

The company’s earnings before interest tax depreciation and amortisation (EBITDA) improved to ₦3.31 billion in H1-2021, supported by a similar advancement in Q2-2021 to ₦1.61 billion.

“We note that PZ’s EBITDA’s annualised run-rate of ₦6.63 billion is ahead of our 2020 forecast of ₦4.50 billion by 47.4%”, analysts said.

It was noted that the significant year-on-year expansion in PZ’s EBITDA was supported by the twin impact of stronger revenue growth and lower cost of sales.

Operating expenses rose 13.3% to ₦4.03 billion in Q2-2021 and 11.9% to 8.16 billion in H1-2021.

Analysts explained that the increase in operating expenses was largely due to administration expenses, which rose by 34.1% in H1-2021.

“We link the ballooning operating expenses to Covid-19 donations by management and COVID-19 safety management expenses incurred across the firm’s facilities”, Chapel Hill Denham stated.

Net operating cash flow was stronger in H1-2021, rising to ₦6.87 billion from ₦2.82 billion in H1-2020.

Analysts believe this was braced by management’s cash preservation policy, which supported working capital.

The improvement in working capital was largely driven by an increase in trade and other payables by 31.1% (to ₦41.03bn), alongside a decline in inventory and trade & other receivables by 17.5% (to ₦22.40bn) and 31.4% (to ₦10.66bn) respectively.

FX devaluation slows earnings in Q2-2021 at ₦654 million and in H1-2021 at ₦2.85 billion.

Analysts recalled that PZ Cussons recorded an exchange loss of ₦946 million in financial year 2020 and ₦1.01 billion in Q1-2020.

The exchange losses were attributed to the impact of naira devaluation to ₦394.00 (21 December 2020) at the Investors and Exporters window, compared to an average of ₦363.00 in 2019.

Besides, given that PZ’s white goods (durable electronics) business segment is heavily dependent on resale importation, analysts said the company is exposed to exchange rate losses on unhedged positions.

Sale of Nutricima Limited is now completed

In H1-2021, the company completed the sale of Nutricima for ₦2.124 billion as consideration and realised a profit on disposal of ₦1.742 billion.

The portion of the land sold to Friesland Campina WAMCO Nigeria PLC is approximately 67,733.235 square metres, in respect of the Nutricima Limited factory premises.

“We remain positive on PZ in 2021, tracking turnover growth at 15.0% to ₦76.74 billion, and a profit after tax of ₦1.05 billion, driven by improved demand for HPC and DEA products.

“Given the better than expected outturn in operating results, the upgrade of 2021 estimates is in view”, Chapel Hill Denham said.

Analysts also noted that PZ’s balance sheet still remains well deleveraged.


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