PZ Cussons: A corporate giant on the decline

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The financial performance of PZ Cussons Nigeria Plc, a company listed on the consumer goods sector of the Nigerian stock Exchange, has a decline in most territories in which it operates during the financial year ended May 2015.

During 2014/2015, returns on shareholders’ funds and profit after tax for the Nigerian subsidiary were down and this financial performance has resulted to three years low of the company indices. As results, it reduces benefits for its shareholders and wider stakeholders.

A critical analysis of PZ audited report shows that revenue did not record any appreciable growth in the last five consecutive years. It, however, looks like the company’s turnover has been pegged to an average of N71 billion. For instance, the figure was N72 billion in 2012 compared to N71 billion in 2013.

PZ Top line indices
PZ Top line indices

The figure did not get much better in 2014 as turnover stood at N72.9 compared to N73.1 billion in 2015. The stagnant revenue compelled NewMail analysts to examine its financial report further in order to unravel the mystery behind it.

After a painstaking analysis of its books, we observed that significant diminution in value of investments, increasing interest cost, huge provision for bad and doubtful debt, and high operating cost are the major factors eroding PZ Cussons margins.

From the research conducted on its operation and books, it shows that PZ Cussons had unsold goods worth N21 billion in its stock, represent 28 percent of gross income. That would have been added to company sales if management was able to expand its market share in the review period.

The principal activities of PZ remains the manufacture, distribution and sale of a wide range of consumer products and home appliances which are well known brand names throughout the country in detergent, soap, pharmaceuticals, cosmetics, confectionery, refrigerators, freezers and air conditioners.

PZ profit margin chart
PZ profit margin chart

Value for Investors
An investment in PZ’s shares in the last five years has yielded profit in terms of capital appreciation and good benefits (cash dividend).

The company is one of the few companies that have recorded profit and has paid dividend five straight years consecutively in its sub-sector. The earnings per share (EPS) grew from a negative 61 kobo in 2012 to N1.02 kobo in 2015. It maintained average EPS of N1.13 in five years.

The management has paid a total of N3.12 as dividends to shareholders in five years at average of 62 kobo per year. However, dividend payout has nosedived since 2011 due to weak performance in its operations.

Financial Performance
PZ Cussons Nigeria Plc reported a 0.3 percent rise in revenue to N73.1 billion, the figure stands as the highest revenue the company ever achieved in the last 10 years. The company has consistently recorded growth in its earnings in the last five financial years (2011-2015).

A cursory look at the five years financial statement showed that revenue had an average cumulative growth of three percent while five years growth stood at 11 percent. Sales grew from N65.9 billion in financial year ended 2011 to N73.1 billion in 2015. Operating profit grew by 11 percent in five years from N18.5 billion to N20.5 billion.

Gross profit as well experienced a marginal increase as the figure stood at N20.5 billion against N19.2 billion. Interest cost increase by 215 percent from N141 million to N444.8million in 2015.

As a result, profit before tax (PBT) dipped by N399 million between 2014 and 2015 from N6.95 billion to N6.56 billion in 2015.
It posted a profit after tax of N4.6 billion in 2015 from N5.1 billion profit in the corresponding period of 2014, showing a decline of 10.1 percent. On the other hand, PZ Plc has accumulated N23.2 billion as Profit after Tax (PAT) within the five years period.

PZ Earning Per Share Chart
PZ Earning Per Share Chart

Capital Adequacy
The huge increase in finance cost to N444.8 million for financial year ended May 2015 from N141.1 million in 2014, of which, suggests PZ Cussons resorted to extensive borrowing during the financial year.

This may not be a potential source of concern as the balance sheet shows little strains on the working capital. Operating cash flow closed at N2.5 billion, 49 percent drop from opening cash flow of N4.47 billion. We observed from the cash flow that the management spent N2.5 billion on investment while N3.9 billion was used to offset outstanding loans.

Profitability
By and large, gross profit fell to N20.5 billion from N19.2 billion in 2014 while profit before tax (PBT) and profit after tax (PAT) declined six percent and 10 percent to N6.6 billion and N4.6 billion for 2015. This put pre-tax and net margin at 8.97 percent and 6.25 percent; a deterioration from 9.53 percent and 6.97 percent respectively in 2014.

Return on Equity, RoE, which reveals how much profit a company earned in comparison to the total amount of shareholder equity also fell during the financial year ended May 2015. RoE stood at 10.47 percent (lowest in three years) against 11.95 percent and 11.46 percent in 2014 and 2013 respectively.

Asset Quality
A review of the balance sheet of the company as at 31st May 2015 showed that inventory levels grew from N20 billion to N21 billion, while fixed assets stood at N25.2 billion compared with N24.5 billion in 2014.

Financial analyst also note a steep decrease in current liabilities from N24 billion to N19.6 billion in 2015 (representing a 18 percent decline) as trade debtors dipped in 2015 by 13.4 percent to close at N17.9 billion from N20.7 billion. Due from related companies also recorded a drop, from N1.03 billion to N916.6 million, while cash and bank balances down to N2.33 billion from N4.48 billion in 2014.

PZ Five-year audited report
PZ Five-year audited report

Liquidity
Liquidity ratio, which expresses a company’s ability to repay creditors out of its total cash, shows inability of PZ management to meet its short term obligations to creditors as they fall due in the recent year.

Quick (acid test) ratio stood at 1.08:1 from 1.09:1 recorded in 2014, implying that the company would not be able to meet its financial obligation as when due.

However, NewMail analysts are careful not to view these performances in isolation as they note that creation of new business line and strategic investment may have caused the aforementioned.

Meanwhile, current ratio of PZ Cussons fell within accredited standard of 2.0:1 as the figure stood at 2.16:1 from 1.94:1 in 2014. The company recorded a growth in Net Assets from N42.5 billion to N43.7 billion in 2014.

Future Outlook & Advisory
In line with the strategic plans and direction in the coming year end, the management of PZ Cussons Nigeria plc says it is optimistic that the company will deliver the targets.
However, as observed from the company performance, the company needs to improve on its sales and distribution unit in order to reduce unsold stock and earns more income. The management also needs to be cost effective as cost to income ratio is on the high side.

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