Stock Type: Defensive
Rating: Hold
Current Market Price: N23.50
Fair Value: N24.50
Key Financial Tickers
• The company’s earnings reversed from loss position in the first half year of 2016.
• The next financials expected is the nine months performance for the period ended February 28th 2018 from the last week of March, 2018.
• We have rated earnings quality of PZ Cussons HIGH, following the reasonable level of consistency noticed in the released date.
The Company’s Product/Strength
PZ Cussons Nigeria Plc (formerly Paterson Zochonis Industries Plc) is a diversified conglomerate engaging primarily in the manufacture and sale of a wide range of consumer products and home appliances. PZ has a wide range of product portfolio which includes;
• Personal and Home Care products and appliances which are leading brands in detergents, soap, pharmaceuticals, cosmetics, confectionery,
• Refrigerators, freezers, air-conditioners, plastic containers and components.
• The group also distributes the milk products of Nutricima Limited, a related company.
• PZ is a highly diversified conglomerate with main focus on the Fast Moving Consumer Goods (FMCG’s) market.
• PZ has a product portfolio made up of established and highly-valued brands like Elephant detergent, Joy beauty soap, Robb etc
• Continuous product innovation has impacted on turnover growth
• It has properly managed production cost levels relative to competitors.
• The company’s stock is defensive, given its low share price volatility and the possibility of only little variation in earnings.
Liquidity/Risk Ratios
• Although the ratio reduced from the comparable period’s estimate, 88.40% debt to equity is on the high side. In-fact in the previous year it was noticed that total debt is above equity value.
• In the two comparable periods, the company shows strength in offsetting its short term liabilities/obligations
• Financial leverage equally shows strength and guarantee investors’ safety as total assets almost double the equity value.
Profitability Ratios
• Typical of its industry, 70% costs of sales is fair. Though care should be taken to caution on the rise of the ratio.
• On the sentiment that the company just exited loss region, one can assume that other profitability ratios are acceptable, but are expected to grow over the year.
Company Figures
• As can be seen from the financials, a lot of improvements are required from the company. Nevertheless, we have rated the performance high and impressive.
Efficiency Ratios
• Over the comparable periods, the management efficiency is commendable. For example, the total asset turnover is estimated at 49.62%, a marginal growth from previous quarter
• Similarly, 93.48% equity turnover is commendable. Also the company has used more debt to finance activities.
Investment Ratios
• Making the earnings impressive is the fact that the company exited a loss position. Nevertheless, considering the share price of PZ Cussons, performance improvement is urgently needed.
• Further revealing the unacceptable gap between investors’ valuation on the floor and the earnings per share is the estimated 0.66% Earnings Yield, which is quite on the low side.
Quarterly Growth
• As noted above, the company exited the red region from the first quarter of 2017 to the second quarter. This is a commendable improvement and must have lowered investors’ fears. We expect the growth to be more evident in the nine months’ financial performance.
Technical View
• Support point identified with PZ Cussons’ share price is around N22.76 and N20.24
• Three major resistance points are ahead the N22.76 support. They are N23.54, N24.15 and N25.08
• We foresee price pulling back to the N22.76 any moment from now
• When this happens, traders may attempt short term positions, although with the understanding that only little profit could come out of such trade
• Nevertheless, we are of the opinion that both medium and long term positions in the share price of PZ Cussons will yield reasonable returns with reduced risk.
Valuation
In valuing PZ Cussons, a number of valuation metrics, such as Price-to-Book Value method, Price-to-Sales method, Price-to-Earnings method and Discounted Cash Flow method (with a discount rate of 15.09%), were used. After applying appropriate weights with bias for Price–Earnings valuation and Price-to-Sales valuation, we arrived at a fair value of N24.50 per share.
Recommendations
We believe PZ’s latest result is fair, considering the environment within which it operates, and comparing the current earnings to that of the corresponding period of 2016, we have fairly rated the performance. We expect more relaxed business environment in 2018, especially given the improvement the nation is currently recording in its economic indices, thus more positive statistics are expected from the management of Z Cussons.
On the strength of the above, we recommend long-term positions in the shares of PZ Cussons. In our opinion, this will reduce investment risk and place investors at more advantage of profiting.
By JEARIOGBE TUNDE SEGUN
Equity Analyst
