By Emeka Anaeto, Economy Editor

AGAINST the expectations raised by PZ Cussons UK, the parent company, PZ Cussons Nigeria Plc, last week, announced one of its worst interim results so far. Though good on topline, the increased revenue in the first quarter 2017, Q1’17 (June – August, 2016), came with a N2.4 billion loss before tax.

Earlier in the previous week, PZ UK had released a trading statement which covers the period 01 June 2016 to 27 September 2016, pointing to a robust performance of product offerings with regards to sales in Nigeria across all divisions, despite the continued inflationary pressure faced by consumers.

Good YoY financials

While sales of N16.8 billion grew 12 per cent year-on-year, YoY,  the bottom line showed losses of -N2.4 billion and -N1.4 billion on the profit before tax, PBT and profit after tax, PAT lines respectively.

Investment analysts see the topline growth as impressive given that this is the first time that PZ will record sales growth on a YoY basis in five preceding quarters.

Impressively also, gross margin expanded by 693 basis points YoY to 34.5 per cent, signalling that the company’s strategy of sourcing key inputs locally may have started paying off, leading to reduction in operating cost YoY.

Obviously, the foreign exchange loss of N4.7 billion during the quarter, could mean that the company would have made over N2.3 billion profit, but for the foreign exchange environment during the period under review.

Even though there seems to be some improvement in accessing foreign exchange, Naira has continued to depreciate both at the interbank and parallel markets. Analysts believe the foreign exchange loss arose from forex-denominated account payables. The balance on this account rose  to N33.9 billion in Q1 2017  from N25.7 billion  as at end of  2016 Financial Year (May, 2016).

But there was a tax credit of N845 million and a positive minority interest contribution of N149 million, which couldn’t help the company escape loss position but was, however, able to reduced after tax loss to -N1.4 billion.

Bad QoQ financials

This near-good perspective YoY performance pales into nothingness when the result is seen quarter-on-quarter, QoQ. Sales actually declined by -11.2 per cent QoQ, while gross margin expanded by 1,267 basis points.

Other than the forex loss, an 11.8 per cent QoQ rise in operating expenses, OPEX, and a -24.7 per cent QoQ decline in other operating income also contributed to the pre-tax loss.

Battling cost, margin pressures

At the beginning of its 2017 financial year, the management of PZ Nigeria adjusted the prices of its products to offset the impact of rising cost inflation on margins.

Analysts believe this move was largely responsible for the seeming YoY impressive revenue and margins performance (saving PZ from what would have been a disastrous QoQ topline), assuming flattish or slightly lower volume.

Revenue could also have benefited from the recent additions of 900g ZIP detergent with lemon fragrance and Morning Fresh liquid dish wash in sachet to the HPC product line.

Analysts comments, forecast
Against the backdrop of the economic headwind which had become worse within the period under review, some investment analysts had expected worse topline than the actual but also expected a better bottomline.

For instance, reacting to the results analysts at FBN Merchant Bank Limited stated: “Compared with our estimates, sales  were 16.4 per cent ahead, helping the gross profit beat our forecast by almost 50 per cent.

“However, we had forecast PBT and PAT of N384 million and N216 million vs. the pre-tax and after-tax losses reported by the company.

“The variance between our forecasts and the actual results was mainly down to the forex loss. On an annualised basis, the results are tracking behind consensus full year sales and PBT estimates of N69.5 billion and N2.6 billion respectively”.

Chairman Board of Directors NB Plc Chief Kola Jamodu, CFR

On the investor reactions to the result, FBN analysts stated: “PZ shares have shed -19.5 per cent Year-to-Date, YtD, (vs -1.3 per cent YtD for the ASI).

“We expect the market to react negatively to these results. We rate the stock Underperform. Our estimates are under review”.

For analysts at Cordros Capital Limited, a Lagos based investment house, “the improvement in forex liquidity is a notable plus for PZ Nigeria, as it suggests that the company could navigate through the challenge of limited forex to finance import requirements and where available, at significant premium that adversely impacted earnings in 2016 full year. “The electrical division has suffered the most, as revenue was down 9.4 per cent in 2016 full year, under the Nigerian environment of dollar shortage.

“But having said that, it is worth mentioning that the CBN remains the biggest supplier of dollars and that volumes altogether (including from autonomous sources) remain far short of demand.

“Risk is that PZ, as in 2016 financial year, may be pressured yet again to augment forex requirement from the secondary market which is more reflective (down 28 per cent since June) of the forex shortage in the system”.

Just before the announcement of the result, Cordros had indicated it was not expecting a good result, forcasting that the implication of the forex situation is that forex losses loomed.

In the short term, the analysts at Cordros also envisaged continued cost pressures which may impact overall performance adversely.

They stated: “With the Naira depreciating further (down 10 per cent at the official market) and impacting on import costs (given PZ’s huge import reliance), reality is that PZ’s management might be compelled to take another price hike sooner.

“A risk here is the possibility of consumers foregoing purchases, especially the discretionary durable electrical goods (but not excluding the HPC) which constitute 34 per cent of sales revenue”.

For analysts at Nairametrics, a Lagos based financial information company, it is really a difficult time for PZ Nigeria. They stated: “PZ Cussons Nigeria Plc is in murky waters. It’s recently released first quarter results showed a huge foreign exchange losses swallowed all of its operating profit, resulting in a loss after tax.

Soaring inflation

“The soap-maker has battled with a scarcity of foreign-exchange, soaring inflation and weaker consumer demand.

“The loss position was due to foreign exchange loss of N4.70 billion that wiped out all of the N2.21 billion in operating profit in the period under review.

“Most companies in Africa’s most populous nation have recorded huge exceptional losses as a result of the adoption of a flexible exchange rate by the Central Bank in June that saw the Naira losing 30 percent of its value to the dollar.

“The economy of Nigeria has been hard hit by a 50 percent drop in the price of oil while GDP shrank to 2.1 percent in the second quarter while the IMF forecast a contraction of 1.80 percent as the country fell into a recession, the first in 20 years. “Inflation rose to 17.60 percent in July as against 17.10 percent as at July, the highest in 11 years”.

However, despite the inclement operating environment, the analysts at Nairametrics see a glimmer of hope in PZ’s horizon.

They, therefore stated: “Nairametrics is of the view that since exchange losses are a one off events of exceptional items, the company will rebound to growth at the bottom line”.


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