PZ Cussons Nigeria Plc


Company Overview
PZ is one of the foremost producers of home appliances and consumer products in Nigeria, with leading brands such as Joy soap, Premier soap, Imperial Leather, Robb, Elephant detergent, Canoe soap and Haier Thermocool. Though it started as a trading company in 1899, PZ commenced manufacturing business as P.B. Nicholas and Company Limited in 1948; it became a public company in 1972. The name, Paterson Zochonis Industries Limited was adopted in1976. And in 1990, it became Paterson Zochonis Industries Plc. On 21 September 2006, the Company chose its present name of PZ Cussons Nigeria Plc.

Though it exports some of its products, PZ derives over 90% of its revenue from Nigeria. Branded consumer goods have higher turnover (over 60% of revenue) but lower operating profit margin and include soap, detergents, cosmetics, pharmaceuticals and confectionery. On the contrary, durable electrical appliances such as refrigerators, freezers and air-conditioners have lower turnover but higher operating profit margin.

PZ prides itself on world-class distribution network while leveraging  on the research capabilities of the PZ group on product innovation.  PZ Cussons (Holdings) Limited (UK), its parent company, possesses 73.3% of the shares of PZ.

Organic and inorganic expansion is at the core of its strategies.   The company has broadened its product portfolio through acquisitions, joint venture agreement and product innovation. Nutricima Limited, producer of edible oil and dairy products, was fully acquired in March, 2015. It has a controlling interest in HPZ Limited, a company domiciled in Nigeria, which produces electrical appliances.

Chief (Dr) Kolawole Jamodu replaced Profesor Edozien as chairman in 2014 while Mr C. Giannopoulos, the CEO, heads the management team.

Investment Thesis
PZ is the largest subsidiary of PZ Cussons Group UK.  Gross earnings have grown by 2.9% in the past seven years while operating profit has grown by less than 1 percentage point. Cost of sales to turnover averaged 72.3%. This has adversely impacted its profit margins. Operating profit margin averaged 9.4% while both PBT and PAT margins averaged 7% and 4.9% respectively.

We are of the opinion that competitive pressure from cheap imported goods has taken its toll on revenue growth. Revenue from branded consumer goods has grown by 2.3% (3.4%) on a Six-Year CAGR basis while revenue from durable electrical appliances has grown by 0.7% (1.8%). But we are of the opinion that the fundamentals have not been impaired. PZ generates a lot of cash; it has NGN14.3 billion cash which translates to NGN3.6 per share in the year under consideration. The company is not overburdened by debt obligations. In addition, PZ consistently pays dividends to its shareholders.Earnings chart of PZ Cussons

A share in PZ should produce a return of 36.4% over the next three years.

PZ trades at 0.6 times sales, 1.1 times book value and 25 times earnings. EPS and BVPS averaged 1.1 and 10.9 over the past 11 years.

Using our Discounted Cash Flow (DCF) Model, a share of PZ is worth between NGN14.00 and NGN17.4. Our Dividend Discount Model produced a value ranging from NGN9.00 to NGN12.80 per share.

Financial Overview
PZ’s revenue of NGN80.6 billion represents a rise of 3.3% compared to a rise of 2.4% recorded a year ago (on a 3-Year Compound Annual Growth Rate Basis).  Gross profit declined by 12.5% owing to 11.6% rise in cost of sales. However, the cost of sales to turnover ratio of 69.6% of 2018 trails its 11-year average of 73%. Operating profit shed 37.7% year-on-year to close at NGN8.2 billion compared to NGN13.2 billion of the prior year, 2017. PZ had a huge exchange loss of NGN5.4 billion (2017: NGN8.8 billion) which depressed net earnings, Profit Before Tax (PBT) margin and Profit After Tax (PAT) margin. PBT plunged to NGN2.3 billion, losing 51.9% in a year.  PAT was NGN1.9 billion down from NGN3.7 billion.

Operating profit margin dwindled by 6.7% to close at 10.2%. PAT margin of 2.4% is less than 12-year average of 12.3%. Though they account for 72.6% of total revenue, branded consumer goods' operating profit margin trailed that of durable electrical appliances.  Branded consumer goods produced operating profit margin of 9.2% while durable electrical appliances' operating profit margin stood at 12.8%. Graph of returns of PZ Cussons

Dividend yield averaged 2.6%. Earnings Per Share (EPS) declined by 45.2% compared to a 78.7% rise of the previous year. Book Value Per Share was NGN10.6 down from NGN10.7 of 2017. Return on Equity (RoE ) closed at 4.3% compared to 8.2% of the previous year. Also, Return on Assets (RoA) was 2.2% down from 4.1% achieved in 2017.

PZ has generated a positive free cash flow of NGN8.7 billion (2017:-NGN2 billion). It is not illiquid and its long-term solvency is not under threat.

Business Risk
PZ faces increasing competition from cheap imported products. Exchange rate volatility impacts negatively on PZ as components have to be imported from overseas. Management should intensify its effort at sourcing raw materials locally to improve its margins going forward.

We are of the opinion that earnings can be improved if efforts are made to penetrate markets outside Nigeria.

Recommendation: Buy

Vital statistics of PZ Cussons