Stock in focus
Geordie Kidston, Head of Research
52 week high yield£3.77 - £2.83
Hist / pros per16.5 - 17.2
Equity market cap£1,359m
PZ Cussons is a long established manufacturer and distributor of Fast Moving Consumer Goods (FMCG) with leading positions, both in the UK and several key Emerging Market territories, with major Western Market brands including the well-known Imperial Leather.
The Group is highly experienced at dealing with conditions in these challenging but high growth territories. It exhibits key strengths in terms of acquiring lowly recognised brands and extending their sales patterns across other territories. Most of the Group’s portfolio has a local bias with names unfamiliar to the UK consumer; PZ Cussons have, for instance, successfully and cheaply acquired brands in Australia which they then distribute throughout Asia, developing new franchises rather than paying up for expensive, but more established local products. Despite challenging conditions in their key markets of Nigeria and Indonesia at present, this is a long term growth model with a disciplined pattern of dividend growth.
The Group operates in three distinct geographies. Within Africa, it has a significant presence in the high growth and fast developing Nigerian market, where long term demographic growth and rising per capita household incomes are exhibiting secular expansion. The Group also distributes products into the less developed markets of Ghana and Kenya, where recurrent economic challenges curb a more established presence. In Asia and Australia, they operate in Indonesia, Thailand, Australia, New Zealand and certain Middle Eastern territories. The European coverage includes the UK, Greece and Poland.
The Group offers exposure to Personal Care, Home Care, Food and Nutrition along with a legacy arm distributing electrical goods, in a partnership with Haier limited to West Africa only. This is a viable long term legacy business that functions satisfactorily but which is managed for its natural growth rate. PZ Cussons is distinctive, operating as it does against multi-national operators in all its territories, for its highly flexible and well invested supply chain network; this is all underpinned
by state of the art factory sites.
In the UK’s North West, the Group has an advanced and fluent manufacturing facility. In Nigeria, for instance, there are three large vertically integrated sites which extend to a dedicated national distribution network. PZ Cussons have extensive experience in cash handling within these challenging markets and curtail their credit exposure through specialised local funding mechanisms. This has wholly negated the type of bad debt experience that major competitors can suffer from.
PZ Cussons is a state of the art specialist operator, nurturing several key brand categories more dexterously across its geographic base than international majors can achieve.
Due to the depressed oil price affecting a Nigerian economy fraught with political disruption, the shares are trading near a 10 year sector low. Continued weakness in oil and gas markets is likely to cause further Nigerian devaluation of the local Naira against the US Dollar. I think that the market is adequately discounting ongoing depreciation and the stalling of growth that it implies. Whilst earnings downgrades for these challenging conditions have been no worse than the sector average, PZ Cussons’ share price is back to 2012 levels, despite underlying earnings being some 15% higher. On valuation grounds, valuing both Europe and Asia in line with peer group averages, leaves the Nigerian exposure valued at a lowly 7.0 times Enterprise Value/EBITDA for 2016. African margins themselves appear to be near trough levels, last seen in the subdued trading period of 2012 when local fuel subsidies were removed, curbing consumer expenditure. To put the Nigerian exposure in context, it accounts for circa 30% of PZ Cussons’ overall profit with Nigeria itself delivering some 85% of African returns.
It is worth reviewing the underlying dynamics of Nigeria long term. It has a fast growing population, with an average family size of four children. The consumer demographic is also relatively much younger than for Western markets, with 41% aged 14 or younger. PZ Cussons has the full architecture of brand opportunities to offer this emerging customer as incomes rise over time. Its consumption of FMCG products remains low by Developed Market standards. Nigeria is likely to develop fast as it has 850km of coastline with international standard port facilities in Lagos. Importantly, technology has penetrated the market quickly with the mobile phone market doubling in the last five years and 45 million internet users online – Nigeria’s population, at 175 million, is more than double that of the next largest African country, Ethiopia.
PZ Cussons is a state of the art specialist operator, nurturing several key brand categories more dexterously across its geographic base than international majors can achieve. It acquires and develops well and has critical market exposure to key high growth territories, such as Nigeria or Indonesia. It is trading through a difficult market due to local currency pressures but has a resilient long term business model.