September 28, 2016/Cordros Capital
Earlier today, PZ Cussons Plc (PZP), the parent company of PZ Nigeria Plc (PZ or PZ Nigeria) released a trading statement which covers the period 01 June 2016 to 27 September 2016.
With regards sales, PZP guided to the robust performance of product offerings across all divisions, despite the continued inflationary pressure faced by consumers.
On FX situation in Nigeria, the known was reiterated: (1) an improvement in liquidity and (2) continued weakness of the naira at both the interbank and secondary markets since the last update in June.
The improvement in FX liquidity is a notable plus for PZ Nigeria, as it suggests that the company could navigate through the challenge — limited FX to finance import requirements and where available, at significant premium – that adversely impacted earnings in 2016FY. The electrical division has suffered the most — revenue was down 9.4% in 2016FY — under the Nigerian environment of dollar shortage.
At the beginning of the 2017FY, the management of PZ Nigeria adjusted the prices of its products to offset the impact of rising cost inflation on margins. Most Nigerian consumer goods companies (including the small informal players who mostly import) have made similar moves.
The price hike potentially bodes well for PZ’s 2017FY revenue (assuming flattish or slightly lower volume). Revenue could also benefit from the recent additions — 900g ZIP detergent with lemon fragrance and Morning Fresh liquid hand wash in sachet — to the HPC line.
However, with the naira depreciating further (down 10% at the official market) and impacting on importing costs (given PZ’s huge import reliance), reality is that PZ’s management might be compelled to take another price hike before March 2017. A risk here is the possibility of consumers foregoing purchases, especially the discretionary durable electrical goods which constitute c.34% of sales revenue.
Also, whilst acknowledging the improved FX liquidity since June, it is worth mentioning that the CBN remains the biggest supplier of the greenback and that volumes altogether (including from autonomous sources) remain far short of demand. Risk is that PZ, as in 2016FY, may be pressured yet again to augment FX requirement from the unofficial source which is more reflective (down 28% since June) of the FX shortage in the system.
PZ Nigeria’s Q1-2016 unaudited result for the period ended 31 August 2016 is due for release. The result was released around end-September last year, however it could be delayed this year, considering management has been fully engaged with the ongoing SAP integration process. That said, we are less optimistic of the result, given that the first quarter is traditionally a low performance period for PZ.
