Join our community of smart investors

Growth or recovery

Where Cussons, best known for its Imperial Leather brand of soaps, is all retrenchment and struggle, Hollywood Bowl, which announced results for the year to end September, is all growth and improvement.

Just a few rows in the table bring out that contrast. Latest profit margins and return on assets at Hollywood Bowl are above their five-year average; at Cussons, the opposite is the case. Similarly, revenues and operating profits have shrunk at an alarming rate over the past five years at Cussons. At Hollywood Bowl, revenues have grown usefully and, thanks to economies of scale, operating profits have grown markedly.

One bowling, one stumbling
 PZ CussonsHollywood Bowl
Share price (p)193267
Mkt Cap (£m)823378
Price/5-yr high (%)52100
PE ratio (prospective)14.917.8
Div Yield (%)4.34.6
Pay-out ratio (%) †6796
Profit margin (latest - %)11.222.5
Profit margin (5-yr ave - %)12.119.3
Return on assets (latest - %)4.911.7
Return on assets (5-yr ave - %)5.510.1
Revenue growth (5 yrs)*-4.410.5
Operating profit growth (5 yrs)*-11.835.3
Source: Co accounts, S&P Capital IQ; †% of free cash flow; *compound growth per annum 

That Cussons shows little sign of arresting its decline may be reason enough that its chief executive, Alex Kanellis, should go, even though the company has been careless with its executive directors lately. The departure of Mr Kanellis – scheduled for the end of January – will mean there is no executive director on the board, the finance director having left in June and not been replaced yet.

This reinforces the impression of a leadership floundering, most likely because it can’t get to grips with the decline in the group’s main market, Nigeria, which contributed 29 per cent of group revenues in 2018-19. At PZ Cussons Nigeria, of which Cussons owns 73 per cent, revenues in the local currency have been static for the past five years, but operating profits have almost vanished as profit margins have slid from 10.4 per cent in 2013-14 to 1.2 per cent in the latest 12 months to end August.

The damage has been fairly evenly distributed between the Nigerian company’s two main operations – fast-moving consumer goods, mostly soaps and similar products, and electrical appliances. In the five years from 2014 to 2019, profit margins in fast-moving consumer goods fell from 6.8 per cent to 2.2 per cent and in electricals the decline was from 12.3 per cent to 4.6 per cent. The first half of 2019-20 will bring no relief. Management says that in Africa revenue and profit continued to fall, as they did group-wide.

Hollywood Bowl’s results glow in comparison. The headline metric for the year to end September is the 5.5 per cent increase in like-for-like revenue from the group’s 60 bowling centres (though at least two of those are too new to figure in like-for-like). That growth was fed by a 3.1 per cent rise in the number of games sold and a 2.6 per cent increase in spend per game and it propelled an 8 per cent rise in revenue to £130m, 14 per cent in operating profit to £28m and 19 per cent in basic earnings to 14.9p.

Understandably, management is confident of more growth to come. Another bowling centre – in York – is due to open during 2019-20, followed by six more by 2023. Additionally, the group is diversifying into indoor mini-golf via three centres scheduled to open this financial year. Hollywood’s bosses reckon mini-golf will attract similar customers to those who go bowling and will require similar skills to run – sounds plausible. The risk is that they will add to fixed costs without the beneficial critical mass of revenues during a period when UK consumers become increasingly reluctant to spend.

Longer term, that may not stop Hollywood Bowl being a steady growth play. Shorter term, however, it may mean the stock is no longer a high-yield proposition. That’s because the special dividend, which has now been paid three years running, would be under threat as cash generation dries up. Without the special, the yield from 2018-19’s dividend would have been only 2.8 per cent – not enough.

That may not stop me putting Hollywood Bowl’s shares in the Bearbull fund, partly because the yield on the final and special dividends alone, which are in the share price until the end of January and paid simultaneously, is 3.6 per cent; partly because the stock offers growth now while PZ Cussons offers the prospect of recovery later. Most likely at some stage that will arrive, the power of mean regression will see to it – a company that has performed below average for some years will, by a combination of having little to beat, trying harder and good fortune, begin to outperform. It happens.