Culled—Proshare
October 10, 2016/Vetiva Research
Weak start to FY’17 as FX woes persist
· Revenue outperforms following price increase
· Revision to forecasts, TP lowered – SELL rating maintained
Outsized FX loss drags Q1’17 earnings
Succumbing to the foreign exchange challenge facing most manufacturing companies in Nigeria, PZ Cussons Nigeria PLC recorded a ₦1.6 billion loss after tax in its recently released Q1’17 financial results.
Though helped by an ₦845 million tax credit, this loss was mostly driven by a whopping ₦4.7 billion foreign exchange loss that we presume was a result of PZ’s dollar denominated payables – noting that the “Trade and Other payables” balance rose to ₦33.9 billion compared to ₦25.7 billion as at FY’16.
FX related challenges remain a major risk to earnings given the sustained weakness in the naira in the official market. Also, as demand continues to trump dollar supply in the official market we believe PZ Nigeria could again resort to fulfilling its FX needs from the parallel market (currently trading at a 54% premium) as it did in the previous year.
Price increase elicits revenue outperformance
On a more positive note, Q1’17 revenue numbers came in better than expected at ₦16.8 billion, outperforming Vetiva and Consensus estimate by 9% and 6% respectively. This was largely driven by an upward adjustment in prices to offset the impact of rising costs on margins.
We believe this could have masked tepid volume performances given that we expect the lull in the white goods segment (contributes 34% to total revenue) persisted through the quarter and amidst a soft demand terrain.
Also noteworthy was the significant expansion recorded in the gross margin to 35% compared to 25% in FY’16. We assume PZ may be benefitting from its renewed drive to source more of its major inputs (palm oil and tallow) locally.
Given the aforementioned, and relatively stable operating expenses (up 3% y/y), profit before tax and exceptional item (FX loss) came in at ₦2.3 billion.
Revision to FY’17 forecasts, TP – SELL rating maintained
Although annualizing the Q1’17 revenue figure puts FY’17 topline below our current revenue estimate (₦67 billion vs ₦73 billion), we note that Q1 historically has the lowest contribution to FY figure (c.21%) and also we see possibility of further price increases this year as the company moves to further protect margins.
However, given our assumption of a further depreciation in the currency by FY’17, we expect the FX loss will grow to c.₦5.6 billion, therefore our EPS forecast is revised downwards to N0.02 (Previous: ₦0.61).
Consequently, our 12-month target price is revised lower to N14.26 (Previous: N20.33).
Click here to download full report
