Business Hilights
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Subdued market across all segments puts PZ Cussons earnings in red

Strong indications have emerged showing serious squeeze on corporate earnings especially fast moving consumer goods (FCMGs) leaders including PZ Cussons.
Business Hilights recalls that PZ published its Q1- 2019 result on Friday last week, with a loss of NGN204.6 million (Q1-18: NGN123.1 million loss).
However, when compared to 2018, analysts’ fears possible continued drop in earnings in Q2, and indeed the rest of 2019.
Also weaker strength in market control has been reported by the parent company considering results released last week.
Some distributors who barred their minds on the development linked the lull conditions in Nigeria ahead of the general elections as they confirmed that “the market has been subdued since June across all segments”, with new HPC launches gaining only little traction.
Accordingly, pundits aver that revenue will decline in 2019E: At -14% y/y and -8% q/q in Q1-19 as PZ’s revenue has declined y/y and q/q for the third quarter in a row.
June-August is off-peak period for the group, and management had in June, guided to continued difficult trading conditions in the local market.
Observer had expected revenue will decline by low single-digit over the low base of Q4-18, and given new products had just been introduced to the market. While revenue performance will be better over the remaining quarters – in the historical pattern – following the last result, it is believed to follow upside that is limited when compared to 2018FY, against a backdrop of still subdued consumer spending (reinforced by the September trading update).
Higher like-for-like (LFL) gross margin in Q1-19 driven by lower FX loss: At 24.3%, reported LFL gross margin was higher by 167bps vs. Q1-18.
The gross margin is consistent with analysts’ expectation, and also an improvement over the last two quarters of 2018FY. We believe the lower FX loss of NGN670 million (-63% vs. Q1-18 and -68% vs. Q4-18) was supportive of the improved gross margin, but while FX – and broadly, gross margin – outlook is positive, risk is that PZ’s FX loss is somewhat unstable and pricing pressure persists (we learnt from distributors that the prices of Joy and Imperial Leather bar soaps were recently returned to their pre-hike levels).
Sticky opex and lower revenue squeeze EBIT:
Despite lower revenue, opex grew by 0.2% y/y and 11% q/q, with the corresponding ratio to revenue at a record-high of 26%. On LFL basis, observers estimate that PZ recorded operating loss of NGN250 million (Q1-2018: NGN90 million) in the review period.
While the focus for PZ must be on maintaining cost control, market followers are afraid that increasing competition will force the group to retain opex around current level (NGN4 billion average quarterly spend since Q1-18) to maintain market share across product segments. On forecast 2% decline in revenue, analysts reduce their 2019E EBIT margin estimate to 3.5% (previously 4.1%).
Changes to earnings estimates and TP:
Market makers adjusted PBT estimate is NGN2.4 billion in 2019E, (previously NGN3.2 billion), equating to 4% growth vs. 2018FY. Save for materially lower opex and finance costs compared to our estimates, there is catalysts for PZ’s earnings in the near term.