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Time to turn positive on the soap, self-tan and baby food maker
Thursday 16 Mar 2017 Author: James Crux


Buy into a rebound at PZ Cussons (PZC), the consumer products giant behind Imperial Leather soap, St. Tropez tan, Morning Fresh dishwasher liquid and Rafferty’s Garden baby food brands.

We believe PZ Cussons’ strong balance sheet and brands will help it weather macro and currency risks. Major product launches and progress on debt reduction offer catalysts for the share price.


Brand champion

A bold but unsuccessful tilt at Unilever (ULVR) from Kraft Heinz demonstrates the allure of consumer goods groups with fantastic heritage and brands, enjoying deeply entrenched operations in emerging markets.

Manchester-headquartered PZ Cussons ticks many of the same boxes, making and selling personal and home care, electrical, beauty and food and nutrition brands across Africa, Asia and Europe. Significantly, the company offers highly prized exposure to the populous Nigeria and Indonesia, challenged-yet-attractive markets on a long-term view.

Shelter from the storms

Half year results (24 Jan) were solid, sterling pre-tax profits only slightly lower at £40.2m (2015: £42.1m). This was despite tough conditions in largest market Nigeria. The company faces £12m of foreign exchange losses in the African powerhouse due to sharp naira devaluation.

Encouragingly, PZ Cussons still reported improved profits from Africa thanks to Nigerian price increases and also maintained profits in Europe, although the ultra-competitive Australian market was a drag on performance. With a 43-year track record of consecutive dividend increases, PZ Cussons upped the first half payout by 2.3% to 2.67p.

Innovative pipeline

The Nigerian consumer is under inflationary pressure but we think PZ Cussons should continue to benefit from its trusted local brands.

A strong balance sheet gives PZ Cussons the flexibility to invest in a significant new product pipeline – numerous product launches and relaunches are underway in the second half – as well as acquisitions.

Investec has a 394p price target suggesting 20.5% near-term upside. For the year to 31 May 2017, the broker forecasts lower pre-tax profits of £100m (2016: £103m), although half-year net debt of £191m should reduce to £150m.

Pre-tax profits are forecast to recover to £107m and then £113m in the years to May 2018 and 2019 respectively. This year, the dividend is expected to grow once again to 8.4p (2016: 8.1p), twice covered by forecast earnings of 16.9p.

Based on Investec’s 14.2p free cash flow per share estimate, rising to 17.7p in 2018, PZ Cussons looks a good value recovery play, trading on a free cash flow yield of 4.3%-5.4%. The approximate 30% Zochonis family stake is an obstacle to a takeover. (JC)


PZ Cussons  (PZC) 326.90p

Stop loss: 261.52p

Market value: £1.39bn


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