February 20, 2017/Cordros Research
Following the loss after tax suffered at the beginning of the current financial year, PZ’s earnings got a reprieve in the second quarter (September-November 2016) after forex losses associated with COGS reduced significantly (-95% q/q). Besides, upward price adjustments positively impacted revenue (+6% y/y), with gross margin reaching record high of 33% over the three months period.
That said, our less optimistic view of PZ, and indeed the Nigerian consumer environment, is unchanged. Importantly, we think the recovery prospect of the HPC segment of the consumer goods sector is well behind the Food Products category. Worse still for PZ is that recovery prospect is a lot weaker in the higher margin Household Durables category accounting for 34% of total revenue.
Expectedly, management confirmed to significant decline in volume across the business divisions over H1-16/17 (HPC -20/30% and Electricals -40%) accompanying the 40/60% increase in prices (taken in phases, via absolute increases and product resizing) during the period. Considering the low visibility on the near end to the ongoing strain on consumer purchasing power (particularly in relation to the potential downward adjustment of the Naira exchange rate), we think PZ will struggle to keep up with management’s 10-13% revenue growth forecast over 2017F and 2018F.
