August 24, 2016/Cordros Research

PZ’s 2016FY revenue was below our forecast by 2% while PAT (-24%) came in much lower. Compared to 2015FY, revenue and PAT both declined by 5% and 53% respectively. Weak revenue (on account of low sales volume) and lower margins (driven by forex-induced cost inflation) primarily accounted for the poor performance. The fourth quarter, notably (see table below), rounded up a very challenging year for PZ — the most difficult the company had experienced in recent trading history, as acknowledged by management. Going forward from 2017FY, our earnings forecasts changed slightly from the last update, meanwhile TP has been revised lower to N10.57 (from N11.02) to account for the surge in risk free rate to 15.2% (from 12%).

The outlook for 2017FY remains largely challenging, given that a host of the pressures the company faced in 2016 remain unresolved. While we expect a slight recovery in top line following price increase by management at the beginning of the 2017 fiscal year, we are concerned about volume performance given the less defensive nature of PZ’s product portfolio, especially the discretionary durable electrical goods which constitute c.34% of sales revenue.

PZ’s management has adjusted relative pricing from the beginning of the 2017FY following the forex induced cost inflation experienced in 2016FY (Q4 especially where gross margin fell to historical low 22%). While the move is expected to positively impact margins in the immediate, concern is that the company’s significant dollar requirement renders margins vulnerable to cost pressures amid the continued depreciation of the NGN value post the liberalization of the forex market. In April, prior to the floating of the NGN, PZ’s management alluded to purchasing dollars at 50-70% premium to the then official rate (N197/USD). The liquidity squeeze in the forex market post the introduction of the new flexible exchange rate regime speaks to the possibility of some of PZ’s dollar purchases being passed at premium to the currently unstable official rate (of between N305-N350/USD).

PZ’s stock is the worst performing among our universe of consumer companies after HONYFLOUR. The 29% decline (using current market value) in the share price since the Ytd high attained in January — despite the general speculation that drove local equities prices over H1-16 — largely reflects the disappointing results, notably Q4-15/16. SELL rating maintained.