Culled—-Proshare

August 18, 2016/FBNQuest Research

• FY’16 revenue lower on weaker volumes
• Margins contract on higher costs
• Revision to forecasts, TP, HOLD rating

Weak Q4 seals unimpressive FY’16/15 revenue performance
Amidst a highly challenging operating environment, PZ released FY’16 results (ended 31 May) showing a 5% y/y decline in revenue to ₦69.5 billion, largely in line with Vetiva’s ₦69.7 billion estimate. With topline depressed in all preceding quarters, the FY performance was sealed by a further slump in Q4, posting the lowest Q4 revenue figure in 6 years.

Looking at the operating segments, Branded Consumer Goods (contributed 66% of revenue) recorded a fourth consecutive y/y revenue decline, down 2.5% amidst tepid consumer demand. Revenue in the White Goods (Electricals) segment fell 9% y/y, down from a 6% growth in 2015. This revenue decline came in despite price increases implemented in the period, suggesting that volumes must have been really weak.

Margins contract on higher costs
With an over 80% exposure to imported raw materials, the persistent FX challenges continues to weigh on PZ’s cost as gross margin contracted 3 ppts to 25%, reflecting the impact of currency depreciation within the period.

Whilst rising cost in the Electricals segment (fully imported) was immediately transferred to consumers, we believe management might have struggled to pass on higher costs in the Branded Consumer Goods segment amidst a highly competitive terrain.

We are of the opinion that the moderation in margin must have been largely driven by more elastic demand in some of PZ’s product categories. Consequently, down from a 5-year average contribution of 59% of PBT, Branded Consumer Goods contributed just 25% to FY’16 PBT with a margin of 1.7% (FY’15: 7.5%).

Overall, net earnings recorded a third consecutive yearly decline, down 53% to ₦2.1 billion (Vetiva: ₦2.8 billion). On this result, the Board of Directors proposed a final dividend per share of 50 kobo (ahead of our 44 kobo estimate) – translating to a dividend payout ratio of 106%.

Revision to FY’17 forecasts, TP – HOLD rating
Whilst we expect consumer demand (particularly for durables) to remain tepid in the near term, we believe price increases (to absorb currency weakness) will cushion revenue. Given this, we have revised our FY’17 revenue forecast to N73 billion (Previous: N70.4 billion).

However, after revising our cost of sales (as % of sales) assumption upwards, our EPS forecast came to N0.61 (Previous: ₦0.82). Consequently, our 12-month target price is revised lower to N20.33 (Previous: N22.21).