By InvestAdvocate

Lagos (INVESTADVOCATE)-Conglomerates Giant, PZ Cussons Nigeria Plc has reported a 23.6 percent (23.6%) slip in Profit After Tax (PAT) in its unaudited first Quarter (Q1) result for the period ended August 31 2011.

PAT dropped from N586, 905 million in the previous year to N448, 303 million in the review period; representing a drop of 23.6%.

While Profit Before Tax (PBT) declined by 23.6% from N863.095 million in the previous year to N659.269 million in Q1 of year 2012.

However, Turnover for the review period increased to N5.7 billion in the Q1 of year 2012 from N12.0 billion in the corresponding Quarter of the previous financial year; indicating an increase of 30.9%.

Investment Research Firm, Afrinvest West Africa (Afrinvest) in its Research Note published Friday affirmed that with an impressive Turnover of PZ Cussons, with a 30.9% increase, PBT and PAT margins subsequently fell by 300bps and 200bps to 4.2% and 2.9% respectively.

Afrinvest said the Market’s reaction since the release of these results has been relatively flat. However, based on these results and today’s close price of N30.55, PZ Cussons trades at a  trailing P/E of 23.9x, a premium to its peer average of 13.4x.

“Management has declined to provide any form of guidance on the finer details behind these numbers. Therefore, from a blend of fundamental valuation methodologies, we derive a 12-month target price of N21.38, representing a downside potential of 30.0%. We thus place a SELL rating on the counter in the short to medium term” the Research note said.

According to Afrinvest, the growth in Turnover may not be unconnected with an increase in sales volume as the PZ Cussons has historically been reluctant to increase prices, despite volatility in the costs of certain raw materials used in its production process.

“This is expected as PZ Cussons operates in a highly competitive environment, as demands for its products are highly price elastic. The company, last year, announced a joint venture with Wilmar International Limited, an agribusiness group, aimed at developing a range of branded products, including edible oils and nutritional spreads, through the creation of a palm oil refinery in Nigeria which is expected to be completed in 2012” the Firm said.

Afrinvest says high cost of power and Foreign Exchange (FOREX) volatility remain factors which adversely impact the profitability of PZ Cussons and continue to be major sources of concern.