By Modupe Gbadeyanka
PZ Cussons Nigeria Plc (PZ) released Q3-16/17 result last month, showing further improvement in profitability (from the loss reported in the first quarter) with 117 percent y/y and 46 percent q/q PAT growth respectively.
The PAT (N1.89 billion) beat our estimate (N764.4 million) by a wide margin, primarily on higher-than-expected revenue (20% variance). The relatively lower COS and opex margins also accounted for the variance between the reported PAT and our estimate.
By revising Q4-16/17 estimate higher, and accounting for the positive surprise in the third quarter, we have increased 2017 PAT to N3.36 billion (previously N1.19 billion).
PZ has implemented aggressive price hikes which, in addition to restoring margin to parity with historical levels, have positioned revenue to grow at the highest since 2009.
But as highlighted in the update on the company’s second quarter result, it is unlikely that PZ will replicate 2017 performance next year. Noting the modest outlook for inflation (especially considering the improvement in the FX environment), we expect producers will temper price hikes from the second half of this year and shift focus towards innovative sales and efficiency drive.
For PZ, stable prices, amid slow volume recovery, especially in the currently challenged Personal Care and Electrical divisions, signal slower revenue growth from the record level achievable in
2017F. We retain our 3.5 percent top-line growth estimate for 2018F.
PZ’s linkage to FX volatility via imports remains substantial, and save for major improvement in NGN/USD exchange rate or the moderation of raw material input prices, there are no visible internal measures that would lower production costs in the short term.
The management has guided to the ongoing backward integration programme to substitute imported CPO with local sourcing as a potential margin enabler, the benefit of which it expects in the medium to long term. In the immediate however, management’s guidance is for a sustainable 22% gross margin. Given our prognosis on costs and pricing, we do not expect gross margin to expand further from the 30 percent average achieved in the last two quarters, and consequently retained our 25 percent average forecast over the short term.
For reference, gross margin dropped to 28 percent in Q3, from 33 percent in Q2, suggesting that PZ may have faced additional cost pressure during the period, given that prices were broadly unchanged.
On 15.2x 2017 FPE, PZ is trading at a discount to Bloomberg’s SSA and Nigerian peer average (although the sample is very shallow), but at premium to the average of Nigerian Foods Products sector.
We roll forward valuation to 2018, revise TP to N14.29 (previously N10.41), and upgrade recommendation to HOLD
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Dipo Olowookere 
Adedapo Adesanya