Culled—Proshare

March 28, 2017/Vetiva Research

·         Q3’16/17 revenue beats estimates, up 44% q/q
·         Margins improve slightly as lower OPEX cushions FX loss
·         ₦1.9 billion Q3’16/17 PAT better than ₦1.5 billion estimate

Seasonally stronger Q3 delivers 44% q/q revenue growth

Supported by traditionally stronger volumes in the period and increased prices, PZ recorded its strongest third quarter revenue figure on record as Q3’16/17 (period ended February 2017) revenue rose 44% q/q to ₦23.8 billion – outperforming Vetiva estimate of ₦20.4 billion.

With this, 9M’16/17 topline (₦57.2 billion) came in 13% higher y/y and 7% better than our ₦53.7 billion estimate. According to PZ Cussons UK (Parent company) in its last management update, PZ (Nigeria) continues to benefit from its diverse brand portfolio (Food & Nutrition, Home & Personal Care, and Electricals segment) with product offerings across all price segments.

Profit margins improve as lower OPEX offsets ₦1.2 billion FX loss
Having recorded a modest ₦237 million FX loss in the previous quarter, PZ surprisingly reported a ₦1.2 billion FX loss on its dollar denominated trade payables in Q3’16/17 despite relatively muted exchange rate movement on the official market in the period.

With this, total FX loss for 9M’16/17 period rose to ₦6.1 billion, above Vetiva estimate of ₦5.3 billion. Impact of the loss on earnings was however cushioned by a sizeable improvement in Operating Expense as EBIT margin rose to 16% (Q2’16/17: 13%).

Whilst PZ Cussons UK had earlier guided to lower Operating Expenses (OPEX) for PZ Nigeria from Q3’16/17 onward (following the completion of a 3-year operational restructuring program), the moderation however came in much sharper than we expected – with OPEX to Sales ratio down 492bps q/q to 16.5% (Vetiva: 20.7%).

We attribute this to a much wider cost cutting agenda in line with the trend observed across other Consumer Goods names.

Consequently, PAT rose 46% q/q to ₦1.89 billion – ahead of Vetiva’s ₦1.53 billion estimate. This sufficiently wiped off the ₦289 million loss as at H1’17 to put 9M’16/17 PAT at ₦1.60 billion (9M’15/16: ₦1.65 billion).

We are more optimistic on PZ for FY’16/17 given the improved revenue growth and cost moderation. We revise our FY’16/17 revenue estimate higher to ₦78.3 billion (Previous: ₦73.2 billion).

Also, following the traction gained in the last quarter, we cut our OPEX estimate to 19.5% (Previous: 21%). Consequently, we estimate EPS and DPS of ₦0.78 (Previous: ₦0.61) and ₦0.60 (Previous: ₦0.46) respectively for FY’16/17.

Overall, we revise our Target Price upwards to ₦16.85 (Previous: ₦15.57).