PZ Cussons returns to profit, hopes for rebound at full year

PZ Cussons returned to profit at the end of the third quarter in February 2017 as earlier anticipated, having wiped out fully its loss position in the first quarter. A strong third quarter trading lifted the company from a net loss of N289 million at the end of the second quarter to a net profit of N1.6 billion at the end of the third quarter. With the company’s usually good last quarter earning result, the conglomerate is hopeful for a major profit rebound at full year in May.

The company’s profit had dropped by more than one-half in its 2016 financial year, a sustained profit drop for the third year running. With renewed strength in the second and third quarters, the company’s earnings prospects for the current financial year have improved considerably and the falling profit trend of the company appears set for an upturn.

A huge foreign exchange loss of N4.7 billion had caused a net loss of N1.58 billion in the first quarter, which was largely reduced by a profit of about N1.3 billion in the second quarter while a profit of N1.9 billion in the third quarter has placed the company on a new strength in profit performance in the current financial year.

Third quarter operations ended in February with a turnover of N57.15 billion, a year-on-year increase of 12.8% and an accelerated growth from 8.8% in the second quarter. The double digit growth is expected to be maintained to full year, as the second half is normally the company’s critical selling period.

Based on the improved growth rate, the company’s sales revenue projection is revised upward from N74 billion to N78 billion for PZ Cussons for the 2017 financial year ending May. That will be an increase of 12.2% from the sales revenue of N69.53 billion the company posted at the end of the 2016 financial year.

Inability to grow sales revenue has been a challenge for the company over the past several years with the worst performance in 2016 when turnover declined to a four-year low. Costs have been rising against stagnating revenue, which explains the company’s sustained decline in profit in the past three years.

The earnings outlook for the current year however indicates an upturn: the strongest growth in sales revenue in several years and the first profit improvement in four years are anticipated. The improved earnings prospects reflect all-round cost moderation at the end of the third quarter. Cost of sales increased only marginally at 2.6% to N37.92 billion against the nearly 13% improvement in sales revenue. That spurred a 40.4% rise in gross profit to N19.22 billion, raising gross profit margin from 27% to 33.6% over the review period.

Further favourable developments came from significant moderations in selling/distribution and administrative expenses. Selling/distribution cost declined by 2.6% while administrative expenses increased by 9.2% – representing a reduced share of sales revenue. The developments lifted operating profit by 190% to N8.16 billion.

A big weight on the income statement in the current year remains the huge foreign exchange loss, which amounted to about N6.11 billion at the end of the third quarter. This is a major growth from a foreign exchange loss of only N495 million in the same period in the preceding financial year. It is nevertheless a significant slowdown from the first quarter when a foreign exchange loss of N4.7 billion threw the company into a loss of close to N1.60 billion.

An outstanding growth of over 122% in interest income to N355 million and a drop of 63% in interest expenses to N205 million has shifted the company’s position from a net interest expense to a net interest income over the review period. That has also helped to dilute the impact of the foreign exchange loss further in the third quarter, shifting the company’s position from a pre-tax loss of N425 million at the end of the second quarter to a pre-tax profit of N2.35 billion at the end of the third quarter.

With the moderation in foreign exchange loss, the company has returned to profit as anticipated. It is expected to grow profit further in the final quarter. The full year outlook indicates after tax profit in the region of N3.5 billion for PZ Cussons in 2017. That will be a rebound of 67% in after tax profit after a drop of 53.4% in the preceding year. This will mark a change of the three-year trend of falling profit for the company.

PZ Cussons continues to maintain an operating advantage of a debt free balance sheet, which has helped it to manage the operating challenges so far. Its robust cash flow position in the prior year however continues shrinking in the current year. Net cash generated from operating activities fell by 83% to N2.84 billion at the end of the third quarter. Despite major drops in net cash used for investing and financing activities, the company has shifted from a net cash increase of N10.54 billion to a net cash decrease of N1.13 billion over the review period.

The company earned 40 kobo per share at the end of the third quarter, slightly below the 41 kobo per share in the same period in the preceding year. Earnings per share is projected at 88 kobo for PZ Cussons at full year. The company earned 47 kobo at the end of the 2016 financial year and paid a total cash dividend of 70 kobo per share.

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