Revenues…slow path to recovery
•PZ Cussons Nigeria Plc “PZ” H1 2013 revenues declined ~ 4.2% YoY to N 31 billion – a recovery from the 8.4% decline in FQ1 2013- and largely in line with our H1 forecasts. FQ2 2013 revenues at N 16.6 billion remained flat YoY for the same period but came in ~15% higher QoQ in line with observed seasonal trends. Management attributes declines to continued unrest in the north, flooding experienced during the reporting period and continued pressures on consumer disposable income brought on by the partial removal of fuel subsidy in January 2012; in our view, this mirrors broader industry trends of slowing revenues through FY 12.
Softer Input cost and reduced taxes bolster earnings
•Gross margins rose 7pps YoY to 25% in H1 2013, with FQ2 margins expanding 8pps YoY to 27% over the same period placing it ~3pps above our forecasts. Deviations from our forecasts were largely due to weaker than expected input prices —average oil prices during the reporting period declined ~5% YoY— combined with the apparent benefits of PZ’s recently launched (in FQ4 2012) supply chain optimisation project.
Petrochemical products, LAB and SLES, which correlate strongly with crude oil prices constitute a substantial proportion of PZ’s raw material inputs. In our view the 12% YoY decline in COGs to N 23 billion, places H1 2013 COGs at 75% of revenues compared to 82% H1 2012—putting it largely in line with trailing 5 year average–probably reflecting these factors.
•SD& A expenses jumped 24% YoY driven largely by a 31% YoY jump in selling and distribution expenses which picked up ahead of the festive season in Q4 2012. Also, the rise in distribution expenses possibly reflects recent initiatives by management to improve its route to market and distribution channels. Nevertheless, operating margins expanded 3pps to 7% YoY coming largely in line with our forecasts. Margins bolstered primarily by softer cost of sales which dampened the effects of rising operational costs as H1 2013 SD& A margins rose 4pps YoY to 18% ahead of the 16% trailing 5 year average.
•Net finance costs declined 7% YoY to N 80 million, providing support to earnings. We attribute this decline to an increase in interest income during the reporting period on the back of a 50% rise in PZs cash balances from FYE 2012 figures. Incidentally, financial liabilities remained fairly flat during the reporting period at N 22 billion.
•Along with moderating costs, H1 2013 PBT rose ~55% YoY to N 2 billion, with FQ2 2013 PBT jumping 83% YoY to N 1 billion( 38% QoQ). Effective tax declined 14pps YoY to 25% providing further support to H1 2013 PAT figures which rose 93% YoY to N1.5 billion. Consequently, PBT and PAT margins expanded 2pps and 3pps to 6% and 5% respectively.
Revenues to rebound with margin expansion poised to continue
•We expect to see stronger revenues through the remainder of FY 2013 reflecting current momentum amid seasonally stronger FQ3 and FQ4 for PZ. In addition, we have remarked signs of an easing in pressures on consumer spending, as effects of the 2012 subsidy removal wanes with adjustment in consumers’ spending patterns. This phenomenon reflected in modest improvements in Trade and Manufacturing GDP growth in Q3 2012 will likely bolster ongoing recovery in sales for consumer goods producers like PZ, whose “White goods” segment contribute about 30% to revenues was particularly hard hit in 2012.
•In addition, consumer goods producers we have discussed with in recent months widely report seeing improvements from adjustments to their respective supply chain structures which was made more urgent by challenges posed by security related disruptions and faltering demand in 2012. Based on this more benign outlook, we revise our FY 2013 revenue forecasts 3% higher to N74 billion, implying a 2% YoY growth which in our view is a modest recovery given the 8.4% slump in FQ1 2013.
•We also revise cost of sales higher 5% to N 56 billion placing cost of sales as a percentage to revenues at 75% in line with 5 year trailing average. We expect recent economic developments in China and India to provide support for crude oil demand, as such believe oil prices could continue to trade at current levels. Given the observed relationship between cost of sales and oil prices, we believe cost of sales as a percentage to revenues should remain at observed levels. However, we expect PZs margin improvement project to continue to dampen effects of high input costs. Revisions place our forecasted FY 2013 gross margins at 25% in line with observed trends which we believe should continue through FY 2013.
•Observed pressures on SD& A possibly indicate that benefits from PZs efficiency projects are yet to filter through operational expenses making our previous forecast too optimistic. We attribute pressures on H1 2013 SD& A to floods during the reporting period with knock on effects driving FQ2 2013 SD & A margins to 20% from 16% in FQ1 2013 and 5pps higher YoY over the same period. We believe pressures attributable to floods have subsidised and foresee declines in distribution expenses through FY 2013, as such we forecast FY 2013 SD& A margins at N 12 billion- placing forecasted SD& A margins at 16% in line with 5 year trailing average.
•While lending rates have yet to track declines in government paper yields we have a more benign outlook for base rates in 2013 despite MPR rates being held at 12% at the January meetings. The company maintained a positive working capital balance at N 22 billion through H1 2012 and there is little indication of an increase in financial liabilities. Nevertheless, for our forecasts we maintain status quo. As such, based on current figures, we revise our net interest expense lower to N162 million from our previous N710 billion forecast.
•We forecast FY 2013 PBT and PAT figures at N 6 billion and N 4 billion implying a YoY growth of 41% and 72% respectively. These revisions place FY 2013 PBT and PAT margins at 8% and 6% respectively.
Model adjustments impact valuation
•Based on adjustments to our model we estimate fair value at N 29.5. However, following a 36% rally since our last update, PZ now trades at a 13% premium to this estimate. Clearly, investors’ recent appetite for defensive consumer themes has played no small role in this pricing. Nevertheless, PZ trades at a FY 2013P/E of 31x and a current P/E of 42x, which is well above peer average of 26x which is hard to justify despite Nigeria’s market potential. We thus maintain our SELL rating on the stock on valuation grounds.
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