PZ Cussons Nigeria Plc: Dividend income not sure

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Introduction
Somehow, PZ Cussons Nigeria Plc held on to its ability to generate sales and make profits for its 2016 financial year. But such ability was undermined by Nigeria’s shaky economy and its attendant reduced consumer purchasing power. It recorded a much lower profit at the end of the year, but dedicated almost everything to dividend payout.
Its 2017 financial year seems to be shaping up to be worse. PZ Cussons might make a loss for the first time in years and shareholders are bound to be affected negatively dividend-wise.

Core operations
The common trend in the Nigerian manufacturing sector in 2015 and 2016 was for many companies to record a lower revenue because of the reduced purchasing power of the average Nigerian. PZ Cussons towed the line and had a gross revenue of N69.53 billion in 2016, about five per cent lower than the N73.13 billion it recorded in 2015. An inability to curtail administrative expenses and a higher net finance cost than 2015’s saw to it that pre-tax profit was N3.15 billion, more than fifty per cent lower than what was recorded in 2015. After tax was remitted to appropriate authorities, the company had a profit of N2.13 billion, also drastically lower than 2015’s result.
As was expected, earnings per share was 47 kobo, lower than the 102 kobo that the conglomerate recorded in the preceding year. Total dividend per share in 2016 was 50 kobo, 18 per cent lower than the 61 kobo declared in 2015.

Profitability ratios
With lower profits, it was imperative that PZ Cussons’ profitability ratios for 2016 be negatively impacted. For the year, it recorded a profit margin of 4.5 per cent, lower than 9.0 per cent in 2015. Analysis shows that for every N100 earned by the company in the course of the year, it recorded a profit of N4.50, as compared to a profit of N9.00 in the preceding year.
The company’s performance in terms of returns on assets and equity took a dip in 2016. Recording a return on assets (ROA) of 4.2 per cent, much lower than the 9.7 percent it did in 2015, in indicative of a worsening ability to translate assets deployed into profit. A return on equity (ROE) of 4.9 per cent in 2016 was also much lower than the 10.5 per cent recorded in 2-15.
With a lower workforce (1,786 employees in 2016 as compared to 1,869 employees in 2015), the company had a slightly lower earnings per employee during the course of the year. Earnings per employee was N38.9 million in 2016, slightly down from N39.1 million in the prior year.

Other ratios
As per the liquidity position of the company, it was not able to convert assets into needed funds as fast as it did in 2015, but still maintained a very high current ratio. Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was 1.8 times, and suggests a still high efficiency of the company’s operating cycle and its ability to turn its products into cash.
Having a debt to equity ratio of 0.71 shows that the company is using only 70 kobo of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N1.70 of total capital for every N1.00 of equity capital. This was however a little higher than the N1.54 result the company recorded in 2015.
PZ Cussons’ shareholders’ funds could finance a commendably high 91.7 per cent of its total capital for its 2016 financial year. This was very close to the 92.1 per cent recorded in the preceding year. This result was also heads and shoulders above the industry average for the period under review.

Sustainable growth
For the review year, the company recorded a profit of N2.13 billion, and chose to pay shareholders a proportionally higher level of dividend than it did in the prior year. It therefore retained a much lower proportion of its profit in 2016. Retention ratio was a mere 0.06 times, as compared to an already low 0.3 times in 2015. What this means is that this company is one that is absolutely sold out to dividend payment.
Meanwhile, profit for the year was 4.5 per cent, down from 9.0 per cent. This means that the company was able to get a profit of N4.50 from every N100 sales made in 2016, as compared to N9.00 in the prior year.
With a lower asset turnover, the company recorded a sustainable growth rate of 0.4 per cent, meaning that it had the capacity to grow by only 0.4 per cent using on the resources it generated. It however actually declined by 4.9 per cent instead of growing.

2017 Q2 result
The 2017 financial year does not look like it’s shaping up to be a great one for PZ Cussons and its shareholders. It did record a slightly better turnover than the corresponding period in 2016, but the company had a higher cost of sales. Instead of a profit, the company had a loss for the period.
If things continue as they are, the company is likely to join the bands of companies who are posting losses at the end of the full financial years. If that is to be the case, shareholders may not receive a dividend at the end of 2017.

Stock value
This is a grossly overvalued stock. On March 9 2017, the market price of PZ Cussons was N15.00, and this is currently one of the stocks that fall within the median range on the Nigerian Stock Exchange (NSE). Our analysis however shows that this stock should ideally be sold for much less. As at analysis date, net assets per share was a mere 54 kobo, just a wee fraction of the current market price.
Also, the company is worth much less in reality than it is selling for on the NSE at now, as shown by a much lower book value as compared to its market value. While book value is N2.13 billion, current market capitalisation is a ridiculously higher N57.2 billion. This also, is a sign of overvaluation.
Not only is this stock overvalued, it might also be difficult for new investors even buy into the company while hoping for even more capital appreciation because it is not a penny stock and mid-level investors cannot purchase a large number at one.
Even though this is a share that yields consistent dividend income, we do not recommend a buy at this time.

Unique strategies
PZ Cussons is a company that leverages on its brands in the Nigerian economy. Its Personal Care unit prides itself on the delivery of innovative products and brands that meet consumers’ needs. For example, its rich heritage and equity in toilet soaps has resulted in pioneering the move from washing with bar soaps to the Personal Care range of shower gels and lotions, and the creation and growth of the Cussons Baby gift packs, aiding brand trials and facilitating growth of the brand.
The Home Care unit, consisting of the fabric care and dish wash categories, continues to provide high quality innovative products. Morning Fresh maintained its leadership position in the dish wash category despite the influx of stiff international and local competition. During the course of the year, it also did well in its electrical brand, as well as its food and nutrition brands.

Conclusion
Investors will do well to hold on to their investments in hopes of capital gains and appreciation years down the line.
*Source: PZ Cussons’ 2016 financial report
* PZ Cussons’ 2017 Quarter 2 unaudited results
*The Nigerian Stock Exchange

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