PZ Cussons rising from first quarter loss

PZ Cussons traded at a profit in the second quarter, which reduced its loss position in the first quarter considerably. The conglomerate is still in the red but hopes are high for a return to profit at the end of the third quarter in February. A huge foreign exchange loss that caused a net loss of N1.58 billion in the first quarter has abated, making pre-tax profit almost as good as operating profit in the second quarter.

The company had lost more than one-half of profit in its 2016 financial year, a sustained profit drop for the third year running. A renewed strength in the second quarter operations is expected enable the company to close the current financial year on profit but a further profit drop for the fourth year looks quite likely for PZ Cussons in 2017.

Second quarter operations ended last November with a turnover of N33.30 billion, a year-on-year growth of 8.8%. This is a slowdown from the 12% growth in sales in the first quarter. Sales volume is normally uneven across quarters for the company and the second half is usually stronger than the first.

Based on an expected step up in sales revenue in the second half, the company is expected to close the 2017 financial year in March with a turnover in the region of N74 billion. That will be an increase of about 6% over the sales revenue of N69.53 billion it reported at the end of the 2016 financial year.

Slow growth in sales revenue has been a challenge for the company over the past several years with the worst performance in 2016 when it declined to a four-year low. Rising cost against slowly growing sales explains the company’s sustaining decline in profit.

The company’s improved performance in the second quarter reflects all-round cost moderation. Cost of sales went down by 2.1% to N21.83 billion against the improvement in sales revenue. That spurred a 38% rise in gross profit to N11.47 billion, raising gross profit margin from 27.4% to 34.4% over the review period.

Further favourable developments came from significant moderations in administrative and selling/distribution expenses. Administrative expenses were flat at N2.71 billion and selling/distribution cost increased marginally at 2.3% to N4.41 billion at the end of the second quarter.

The developments lifted operating profit by nearly 230% to N4.35 billion. Also, foreign exchange loss, which amounted to N4.7 billion in the first quarter, only inched up to N4.94 billion at the end of the second quarter. This is incomparable to a tiny foreign exchange loss of N1.4 million in the same period in the preceding financial year.

An outstanding growth of over 236% in interest income to N259 million and a drop of 47% in interest expenses to N201 million shifted the company’s position from a net interest expense to a net interest income over the review period. That also helped to dilute the impact of the foreign exchange loss in the second quarter but the company still ended the second quarter in a pre-tax loss of N425 million.

There is nevertheless a significant improvement from a pre-tax loss of N2.43 billion in the first quarter. A tax credit of N136 million lowered the loss to an after tax figure of N289 million compared to a net profit of N779 million in the comparable quarter in the prior financial year.

Based on the second quarter outcome, a further significant growth in foreign exchange loss is not anticipated in the second half. Earnings growth is therefore expected to accelerate in the remaining two quarters. Based on these expectations, the company is expected to return to profit at the end of the third quarter and grow it further in the final quarter.

The growth force isn’t expected to be strong enough to achieve a profit rebound at full year. The company’s after tax profit looks likely to drop yet for the fourth year running at the end of the 2017 financial year.

PZ Cussons has an operating advantage of a debt free balance sheet, which has helped it to manage the operating challenges so far. Its robust cash flow position in the prior year is however shrinking in the current year. Net cash generated from operating activities fell by 67% to N5.56 billion at the end of the second quarter. Despite major drops in net cash used for investing and financing activities, net cash increase dropped from N10.54 billion to N2.19 billion over the review period.

The company reduced its loss per share from 40 kobo in the first quarter to 7 kobo at the end of the second quarter against earnings per share of 20 kobo in the same period in the preceding year. It earned 47 kobo at the end of the 2016 financial year and paid a total cash dividend of 70 kobo per share.