Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The Carex-to-Imperial Leather group is fixing problems caused by previous management

One of Shares’ key stock selections for 2021, branded consumer goods group PZ Cussons (PZC) is making progress against a multi-year turnaround under new chief executive Jonathan Myers.

We believe there is extraordinary value in its portfolio of personal care, home care and beauty brands which the new and strengthened management team can unlock.

The market is coming round to our way of thinking, with the shares up almost 20% year to date to 275.5p. This means PZ Cussons has outperformed consumer goods peers including Unilever (ULVR) and Reckitt Benckiser (RKT).

We are encouraged that the transformation is well underway, with results for the six months to 30 November 2020 revealing revenue and profit growth in all regions and net debt dropping from £137.7 million to £18.2 million year-on-year.
Yet there remains much work to do, particularly in reducing the complexity of its Nigerian business, while PZ Cussons also faces near-term uncertainties linked to the pandemic, such as shifting consumer behaviour and rising cost pressures.

CLEARLY COMMUNCATED STRATEGY

PZ Cussons’ competitive advantages include an enviable portfolio of personal care and beauty brands. These include Carex, the UK’s number one hand wash brand bought by half the UK population last year as Covid brought hand hygiene issues to the fore. It also owns Imperial Leather soap-to-shower gel and tanning brand St. Tropez.

At PZ Cussons’ investor day on 25 March 2021, Myers explained how the company had declined in recent years under previous management. He identified past failings ranging from underinvestment in the brands to spreading limited resources too thinly and taking its eyes off the consumer.

Put simply, the issues facing PZ Cussons today were years in the making and will therefore take time to recover.

Myers’ strategy is to reignite the pioneering spirit of a company with more than 130 years of heritage. The £1.17 billion business now aims to serve consumers better, beating the competition across its three
core categories of hygiene, baby and beauty, and deliver low to mid-single digit sustainable profitable revenue growth.

‘MUST WIN’ BRANDS

There are eight priority brands across the hygiene, baby and beauty categories in the company’s four key markets, which are Indonesia, Nigeria, the UK and Australia. These eight names – Carex, St. Tropez, Sanctuary Spa, Premier, Joy, Cussons Baby, Morning Fresh and Original Source – contribute half of the company’s sales, two thirds of gross profit and receive 75% of the marketing spend.

Going forward, they will receive the bulk of investment in marketing, innovation and management time with the aim of driving an acceleration in group-level growth.

PZ Cussons plans to grow these ahead of the remaining 42 brands, which still have a role to play, ranging from incubation to becoming the priority brands of the future, or simply as cash cows to fund investment in other parts of the group. None of them have been put up for sale, although some duplicated brands could be rationalised.

The company has created the ‘Growth Wheel’, a systematic way for PZ Cussons to drive sustainable, profitable growth by meeting consumers’ needs and desires, getting the price positioning and price mix right, communicating the brand equity and ensuring products are available wherever and whenever the consumer needs, including online. ‘Put simply but holistically, it is brand building,’ enthused Myers.

LAND OF OPPORTUNITY

The current profile of PZ Cussons’ revenue generation is fairly balanced, split 55:45 in favour of developed markets versus emerging markets.

In recent years, there has been much investor debate over the merits of Nigeria in the portfolio, but management are committed to this African market with favourable long-term demographics.

Myers describes Nigeria as ‘a land of opportunity for consumer brands’, boasting a population of 209 million which is forecast to double by 2050.

With no plans to exit Nigeria, management’s focus is on reducing complexity and boosting cash generation from the business, pulling self-help levers now rather than waiting for economic recovery to ride to the rescue.

In this country, PZ Cussons will aim to drive growth in its priority brands – namely Premier, Joy, Cussons Baby and Morning Fresh, and restore profit in its large electrical business. A lot of people don’t realise it sells fridges, freezers and washing machines under the Haier Thermocool brand.

Management also confirmed its belief in edible oils brands Devon Kings and Mamador, which have broad national distribution in Nigeria. ‘Strong brands and a proven route to market represent the foundation for our return to profitable growth in the country,’ insisted Myers.

CLEAR TARGETS

The final stage of the company’s turnaround is likely to take several years but there is an ambition to have significant progress over the next three to five years.

There are three clear financial targets for the company; to deliver low to mid-single digit profitable sales growth, a mid-single digit operating margin for Nigeria, and a mid-teens group operating margin.

Myers also has an ambition for PZ Cussons to achieve B-Corporation certification, which no other listed UK company has yet to do, by 31 May 2026. This is a big commitment that will see PZ Cussons balance purpose and profit, working towards carbon neutrality, building on its plastics and palm oil promises.

Management made the case that sustainability is ‘already in our DNA’, highlighting past successes such as the removal of plastics and building classrooms in Nigeria and working with retail customers and suppliers to drive improvements across the entire supply chain.

‘We’re putting sustainability at the heart of everything we do as part of the new strategy,’ stressed Myers, adding that ‘doing the right thing has the potential to create value’.

THE ANALYST VIEW

Broker Numis believes the application of a more rigorous approach to brand management and reduced complexity should help the business achieve its financial goals. It says: ‘If the company delivers growth at the upper end of its range and achieves mid-teens margins, we calculate a potential valuation of 474p per share.’ That compares with a 272.5p share price at the time of writing.

Numis forecasts pre-tax profit improvement to £64 million for the financial year to May 2021, building to £70.8 million in 2022 and £77.6 million by 2023.


SHARES SAYS: Based on estimated earnings for this year, PZ Cussons trades on 24 times earnings, falling to 21.7 on next year’s numbers.

The shares have started to rise in anticipation of an exciting turnaround that is only just getting started under Myers and his new, strengthened senior management team. The Carex maker is in caring hands, so buy the shares.

‹ Previous2021-04-22Next ›