PZ Cussons — Update 26 January 2016

PZ Cussons — Update 26 January 2016

PZ Cussons

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PZ Cussons

Negative FX and emerging market challenges

Care & household goods

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27 January 2016

Price

249.3p

Market cap

£1,069m

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Share details

Code

PZC

Listing

LSE

Shares in issue

428.7m

Business description

PZ Cussons is a branded consumer company. Its main businesses are in the UK, Nigeria and Indonesia. At H116, revenues comprised of Personal Care (51%), Home Care (15%), Food and Nutrition (22%) and Electricals (12%).

Bull

Trading in Europe remains strong and the company is winning market share without discounting.

With a strong balance sheet, PZ Cussons is in a position to make opportunistic acquisitions.

Well positioned in Africa and Asia and the company would benefit from a turnaround in growth.

Bear

40% sales are derived from Africa, where there is exchange rate risk and limited near-term visibility.

Supply side logistics could affect the company’s ability to alter its product portfolio to match consumer spending in Nigeria.

Challenging trading in Australian Home Care.

Analysts

Victoria Pease

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3077 5704

PZ Cussons’ European business remains resilient, but Nigeria continues to weigh on profits given the uncertain outlook for consumer spending and FX. The stock dropped c 9% after results and trades at 13.6x 2017e P/E, a sharp discount to its peer group. Although the company is well positioned to benefit from a turnaround in its core African business, in our view a re-rating is dependent on an improvement in macro conditions.

Interim results – Europe balances the rest

Reiterating December’s update, robust trading in Europe largely offset challenging conditions in Asia and Africa. H116 like-for-like revenues were stable at £385.9m, with operating margin declining 20bp to 11.7%. Slowing GDP growth in the key Nigerian and Indonesian markets has affected consumer demand and FX had a negative impact of £34.7m on revenues and £2.4m on operating profit. Management has stated that H2 trading should be in line with expectations, although there is continued FX downside risk.

Nigeria weighs on profits

Sustained low oil prices have contributed to an environment of tight liquidity, impacting on disposable incomes. The electrical division (one-third of Nigerian revenues) declined by 12.4% to £45.4m. Management is implementing changes to its product portfolio to maintain market share without discounting, but with the risk of a further devaluation in the naira, the outlook in Nigeria remains uncertain.

Strong product launches boost Europe

In the context of a declining European market, the company has grown market share through continuous innovation and strong product launches, particularly in UK Beauty (St Tropez, Sanctuary Spa), and the UK Washing and Bathing division (Carex). European H116 revenues grew 6.3% to £136.8m and operating profit grew 4.3% to £45.2m. The q-o-q margin decline from 24.5% to 19.6% was due to the associated launch costs and management expects margins to remain flat in H2.

Trading at sharp discount to peers

The stock dropped c 9% on the back of these results and is trading at a consensus 2016e P/E of 14.8x and 2017e P/E of 13.6x, a sharp discount to its wider HPC peer group. While the company has a strong balance sheet (1.4x net debt/EBITDA) and is well managed, the valuation reflects the company’s limited visibility in Nigeria.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/15

819

84

17.9

8.0

13.9

3.2

05/16e

826

101

17.0

8.2

14.8

3.3

05/17e

851

108

18.3

8.9

13.6

3.6

05/18e

894

119

19.9

9.4

12.5

3.8

Source: Bloomberg

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

AFH Financial Group — Update 25 January 2016

AFH Financial Group

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