PZ Cussons Nigeria Plc have overcome the headwinds caused by a sharp drop in oil price and a severe dollar shortage as the Lagos soap maker’s operating profit spiked as creative price increases bolstered sales.
For the quarter ended November 30 2016, the company’s earnings before interest taxation and amortization (EBITA) surged by 228.87 percent to N4.34 billion from N1.32 billion the previous year. Sales was up 8.80 percent to N33.30 billion.
Operating profit was supported by increased sales and a reduction in cost of sales or input costs amid a tough operating environment.
Top lines got a boost from management’s strategic pricing policy and its prioritization of sough after goods and home care appliances such as Premier Soap.
The focus and market penetration strategy gave the consumer goods giant competitive edge over rivals amid receding disposable income. “PZ’s management said that prices increased by 40-60% across its brands over the past year, and this led to 20-30% decline in HPC volumes,” said analysts at CSL Research Limited, in a recent note to BusinessDay.
“Nevertheless, we believe the impact of volumes decline was mitigated by the introduction of more affordable smaller-sized packets, though at higher prices on a unit by unit basis,” said analysts at CSL.
Analysts at CSL opined that the tactic has worked better on the company’s HPC segment than on its discretionary electronics business, given falling disposable incomes.
PZ Cussons’s gross profit increased by 36.11 percent to N11.32 billion as the company continues to effectively manage direct costs attributable to projects.
Gross profit margins increased to 34.2 percent in the period under review as against 27.20 percent last year. This means the Nigerian consumer goods giant is in sound financial heath and has money left to cover fixed costs.
EBITA margins moved to 13.0 percent in the quarter ended November 2016 from 4.80 percent the previous year.
In spite of PZ Cussons impressive operating performance, the company and its peers operates in a tough and unpredictable macroeconomic environment. “The business environment for the fast-moving consumer goods sector was extremely challenging,” Kolawole Jamodu said Chairman of the company in the statement. Operating conditions were tough largely because of the global slump in the price of oil, on which
Nigeria’s government depends for about 70 percent of revenue, and a shortage of dollars to pay for imports, he said. A severe dollar scarcity caused by depleting external reserve hindered companies from sourcing dollars for the purpose of importing raw materials and machinery to meet production.
Capital controls imposed by the central bank in order to curb the fall in naira sent investors fleeing the country for saver assets elsewhere.
The Abuja based bank pegged the naira at N197-N199 for 15 months while banning 41 items from its official window. These draconic policies were responsible for the country’s first recession in 25 years.
Nigeria’s economy contracted by 2.20 percent as at the third quarter of 2016, according to data from the National Bureau of Statistics (NBS).
The International Monetary Fund (IMF) forecasts that GDP will contract by 1.80 percent by the end of 2016. The inflation rate rose to 18.55 percent in June, the highest in almost 11 years.
Unemployment rate rose to 13.90 percent in the third quarter of 2016 as firms shed jobs at the height of the economic downturn.
John Chukwu, managing director and chief executive officer of Cowry Asset Management Limited said that because the economic confidence is very low, it is difficult for people to continue to buy goods as they used to as inflation has eaten deep into their wallets.
“And this affected the inventories of consumer goods firms,” said Chukwu. “Consumers are staying away from consumption and that is expected in a period of recession,” added Chukwu.
Despite the economic downturn, PZ Cussons was able to keep production costs in checks as cost of sales fell by 1.40 percent to N21.83 billion. “PZ’s management said it has increased its portion of locally-sourced inputs to 60-65%,” said analysts at CSL.
The central bank’s decision to jettison the 15 months currency peg and adopt the flexible exchange rate system saw the naira lose 40 percent of its value against the U.S. currency.
The devaluation had adverse effects on the books of PZ Cussons.There was a huge foreign exchange loss of N4.34 billion that significantly undermined bottom lines.
Because forex losses are exceptional and one off items that are not expected to recur in subsequent quarters, the company’s bottom line will get a boost and shareholder’s value maximized.
The shares of PZ Cussons Nigeria, which is majority-owned by the Manchester, U.K.-based soap-maker, have fallen 30 percent in the past year. That compares with -2.03 percent drops for the Nigerian stock exchange’s benchmark index.
The company has total assets of N87.50 billion while shareholders fund stood at N41.16 billion as at November 30, 2016.
“Our channel check reveals a stronger presence of unbranded dishwashing liquids in the market, and we understand that consumers are increasingly opting for this. PZ’s revenue-driving dishwashing liquid, Morning Fresh, is priced six times higher unbranded liquids,” said analyst at CSL.