Nigeria's chronic corruption, civil unrest and high levels of poverty mean doing business there is not for the faint-hearted. For investors, the risk of failure is high. But the nation is, nevertheless, one of the most compelling economic growth stories in the developing world, and for investors looking for a lower risk way of gaining exposure to this frontier economy, we believe PZ Cussons' (PZC) shares currently represent a great way of getting it.
- Long established in Africa
- New palm oil venture bearing fruit
- Earnings growth ahead of peers
- Unjustified discount to peer group
- Scope for acquisitions
- Diversified business
- Currency headwinds
- Civil unrest in Nigeria
The global home and personal care giant has been doing business in Africa for over a century. Nigeria is its biggest single market, representing 80 per cent of African revenue, and was a key driver of growth in the first half of this year. Alongside this, PZC has robust European and Asian businesses, solid brands and a good balance sheet, which provides it with ammunition for acquisitions. Sales and profits have been hit by well-documented currency weakness in Asia and the emerging markets, but strip that out and PZC is achieving sector-leading double-digit underlying growth. Nevertheless, the shares are rated at a discount to their global peers, which we believe is an anomaly worth buying into.
PZC's African roots means it's an old hand at navigating the chaotic logistics system in Nigeria, which relies not on large distributors, but individuals to buy products such as soap or detergent - the latter often sold by the scoop to shoppers - to sell in their shops or market stalls. Because PZC's products are so well known, they often get pride of place too. Barriers to entry are therefore high.
Additionally, a palm oil joint venture launched a year ago has already turned profitable and should break even this year. The refinery has introduced the first affordable branded, tamper-proof, bottled palm oil into the Nigerian consumer market, offering a safe alternative to the status quo of buying odd coloured oil from large open vats - and a lucrative income stream for PZC. True, there are huge risks operating in Africa, and civil unrest in northern Nigeria is a concern, but PZC has successfully done business there since the mid 19th century.
And Africa's not the whole story. It is the largest division by sales, accounting for 41 per cent of group revenue, but only just ahead of Europe at 39 per cent. And Europe is the biggest profit maker, with 48 per cent of group operating profit, compared with 35 per cent from Africa. This makes PZC a well diversified business with a good geographical and product spread.
The European business is growing too, with the UK bathing division trading particularly well. At the half-year stage in November, group like-for-like sales were running 4 per cent ahead, with operating profit six per cent higher, fuelled by double-digit profit growth in Africa and 8 per cent growth in Europe on relatively flat sales. This more than offset the impact of currency weakness in Asia.
| PZ CUSSONS (PZC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 357p | MARKET VALUE: | £1.5bn | |
| TOUCH: | 356-358p | 12-MONTH HIGH: | 440p | LOW: 35p |
| FORWARD DIVIDEND YIELD: | 2.4% | FORWARD PE RATIO: | 19 | |
| NET ASSET VALUE: | 106p* | NET DEBT: | 17% | |
| Year to 31 May | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 821 | 108 | 16.5 | 6.61 |
| 2012 | 859 | 49 | 8.0 | 6.72 |
| 2013 | 883 | 95 | 14.8 | 7.39 |
| 2014** | 887 | 137 | 21.6 | 7.98 |
| 2015** | 878 | 121 | 18.5 | 8.62 |
| % change | -1 | -12 | -14 | +8 |
Normal market size: 3,000 Matched bargain trading Beta: 0.76 *Includes intangible assets of £297m, or 69p a share **Panmure Gordon forecasts | ||||
Currency is likely to be the biggest headwind this year. However, broker Panmure Gordon expects underlying double-digit growth to continue to offset this and, after accounting for the currency hit, expects adjusted earnings growth of 6 per cent, followed by 8 per cent in 2015 (as opposed to the reported figures, reflecting a Polish disposal, in our table). At constant exchange rates, underlying growth is well ahead of peers. Despite this, according to Panmure forecasts, the shares, price at 19-times 2014 calendar-year earnings, are rated at a 6 per cent discount to their global peer group. And the rating is 15 per cent cheaper than its five-year average versus peers.
Finally, a healthy balance sheet and the £46.6m disposal of its low margin Polish home care business will allow plenty of room for earnings-enhancing acquisitions. Last year PZC snapped up the profitable Australian premium baby food maker, Rafferty's Garden. The plan is to introduce the product into the fast-growing Asian baby food market.
