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PZ Cussons' recovery far from assured

The personal care company saw profits slide as a good period in Asia failed to offset declines in Europe and Africa
January 30, 2018

Back in December, a warning from PZ Cussons (PZC) on a 10 per cent fall in first half operating profits sent its shares tumbling. The share price fared little better on results day, as soon as the realisation dawned that tough trading conditions in Europe and Africa hadn't been offset by improvements in Asia.

IC TIP: Hold at 319p

These results paint two very different pictures due to the high level of exceptional items. Statutory operating profits were 42 per cent to the good once foreign exchange losses and restructuring charges had been taken on board, but that figure reverses into a 10.3 per cent contraction on an adjusted basis. Regardless of the contrasting perspectives, there's little in these figures to bring us round to management's view that profitability (regardless of exceptions) will improve during the latter half of the year thanks to expanded distribution and new product launches.

Foreign exchange has been a particular bugbear for the business in Africa. The historically volatile Nigerian naira has begun to stabilise against the US dollar, but high interest rates, tight consumer credit, and cost inflation has made it difficult for local customers. Personal and home care here still did well, but the Nutricima milk business saw sales and profits slide as competitors cut their prices on comparable products. As a result, sales fell by more than half before exceptional costs were considered.

Cost inflation has outstripped wage growth in the UK, so UK consumers are “shopping cautiously”, and there are few signs that discretionary budgets are recovering. Management said sales volumes had become quite sensitive to price points and discounting, although recent product launches had been “well received”. Nevertheless, domestic sales slipped 6.4 per cent.

The bright spot of these results came from Asia in general, and Australia in particular. The latter saw improved profits across all categories. Unlike the UK, pressures on consumer spending in Indonesia were not enough to dent profits as the business here begins to expand outside of products catered to children. Revenue in Asia improved 1.1 per cent, or 124 per cent before exceptional items. This outperformance is in line with changing demographic and consumer trends on the continent.

Analysts at Investec expect pre-tax profits to fall to £100m in the year to May 2018, giving EPS of 16.9p, compared with £103.5m and 16.9p in FY2017.

PZ CUSSONS (PZC)   
ORD PRICE:319pMARKET VALUE:£1.37bn
TOUCH:318-319p12-MONTH HIGH:368pLOW: 296p
DIVIDEND YIELD:2.6%PE RATIO:20
NET ASSET VALUE:113p*NET DEBT:37%
Half-year to 30 NovTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201637824.94.62.67
201738534.25.02.67
% change+2+37+10-
Ex-div:15 Feb   
Payment:06 Apr   
*Includes intangible assets of £410m, or 96p a share