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PZ Cussons feels the heat in Africa

The consumer goods company has been hurt by the economic downturn in Nigeria
June 20, 2019

PZ Cussons (PZC), the owner of international consumer brands such as Imperial Leather soap and Rafferty's Garden baby food, has its roots in Africa. And, while it has built strong positions in Asia and Europe, Africa remains – just about – its largest market by sales, accounting for 36 per cent of the total. The core of its operations there is in Nigeria. But, as the unemployment rate in the country has risen from around 7 per cent at the start of 2015 to over 23 per cent last year, PZ Cussons has struggled.

IC TIP: Sell at 214p
Tip style
Sell
Risk rating
High
Timescale
Medium Term
Bull points

New product launches

Cost-cutting plans to be announced

Bear points

Trouble in Africa

Analyst downgrades

Falling sales

Uncertain recovery

At the most recent set of half-year results, trouble in Nigeria and higher supply chain costs due to issues at the port in Lagos led to an all-too-familiar round of analyst forecast downgrades. Broker Numis, for example, cut adjusted pre-tax profit forecasts for the year by 12 per cent, and 14 per cent for the following year, while analysts at Investec trimmed theirs by 12.5 per cent. PZ Cussons' share price has followed forecasts lower over recent years (see table).

This downgrade trend looks as though it may well continue. Despite a government push for economic reform, the Nigerian economy has some fairly entrenched problems and unemployment continues to trend upwards. Meanwhile, in PZ Cussons' second-largest market, Europe, Brexit uncertainty is weighing on demand. With the Africa business expected to report a full-year loss, the company currently thinks it will deliver profit before tax and exceptional items of close to £70m, compared with £81.5m in the prior year. However, exceptional items have been a noteworthy and persistent feature of PZ Cussons' results over recent years (see table). 

The company’s adjusted figures strip out the costs associated with restructuring the business and some pension payments. During the first half of the current financial year, PZ Cussons paid £4.1m in its efforts to “realign the organisation”, the same project on which £11.6m had been incurred during the previous full financial year. It also paid £2m in pension costs following a recent UK High Court judgement stating that the defined-benefit pension schemes must equalise male and female members’ benefits. Management is keen to address the long-term margin decline (see table) and plans to give details on initiatives when full-year results are announced on 23 July, but this may be accompanied by further details on exceptional costs.

Given the company's travails, recent management flux is unsettling. Chief financial officer Brandon Leigh recently resigned with immediate effect after 22 years with the company and having been a member of the board since 2006.

PZ CUSSONS (PZC)   
ORD PRICE:214pMARKET VALUE:£917m
TOUCH:214-215p12-MONTH HIGH:244pLOW: 175p
FW DIVIDEND YIELD:3.9%FW PE RATIO:16
NET ASSET VALUE:105p*NET DEBT:37%
Year to 31 MayRevenue (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201682110317.28.1
201780910316.88.3
20187638013.48.3
2019**7047012.48.3
2020**7307613.48.4
% change+4+9+8+1
Normal market size:7,500   
Matched bargain trading    
Beta:1.00   
*Includes intangible assets of £404m, or 94p a share
**Investec forecasts, adjusted PTP and EPS figures