PZ Cussons at the mercy of the Nigerian economy

PZ Cussons (PZC) pointed to “the third consecutive year of like-for-like revenue growth”, but reported that earnings slid due to a £16.5mn impairment of the Sanctuary Spa brand, and increased investment related to transformation plans.

It would be disingenuous to suggest that the consumer products group is engaged in a fundamental transition, but changes are afoot. It intends to buy out the minority shareholding of PZ Cussons Nigeria and de-list the African subsidiary. Management believes the move will create value for shareholders while simplifying the business. And in keeping with sector peers, it is moving to reduce complexity across its supply chains. Not radical change, but change, nonetheless.

Management indicated that internal economic conditions in Nigeria will have an outsized impact on results for FY2024, highlighting the importance of the “foreign exchange market and other fiscal reforms”. Plans are already in place to mitigate any problems that may arise as the group looks to shore up its cash position. Indeed, gross borrowings have increased due to the difficulty of repatriating cash from Nigeria. Adjusted net finance income was in positive territory, against a cost of £1.3mn in the prior year, as improved interest receipts on Nigerian naira cash deposits more than offset an increase in interest payable on UK borrowings.

Shareholders can take heart from the first full year of ownership of Childs Farm, a provider of baby and child personal care products in the UK. The acquisition was initiated in March 2022 and the subsidiary achieved 12 per cent revenue growth in the fiscal year. Theoretically, the integration of Childs Farm should help to underpin profitability as it has delivered solid gross margins ever since it began trading in 2011. As if to bear this out, the group gross margin was 80 basis points to the good, also testament to successful measures to offset cost inflation, although on a statutory basis the operating margin declined by 200 basis points and earnings per share (EPS) contracted by 26.8 per cent, reflecting the impact of the Sanctuary Spa charge.

Inflationary pressures have dissipated to a degree, although the trajectory of crude oil prices is beginning to stoke fears among economists again. Management indicated that performance following the group’s year-end has been in line with expectations. A stable performance in the UK has been undermined by a further decline in Indonesia, but the group expects to deliver a modest uptick in like-for-like revenue and an improved operating profit margin. Related profits are being pitched in line with current market expectations, ergo a range of £61.5mn to £68.2mn.

At 16 times consensus earnings, the share price affords a more viable entry point than the bulk of its industry peers. However, the housekeeping challenges posed by the Nigerian transformation keep us on the sidelines. Hold.

Last IC View: Hold, 202p, 8 Feb 2023