PZ Cussons - St. Tropez meets Lagos

PZ Cussons (PZC.L): When I last wrote on PZ Cussons, in December 2014, there was great uncertainty over the impending Presidential elections in Nigeria. In the event, not only did the elections pass relatively smoothly, but they also resulted in the first democratic transfer of power in Nigeria’s history. There are still many challenges to overcome, (e.g. insurgency, corruption, inflation, weak currency, low oil price), but these are pretty much routine for PZ by now. In these annual results, to 31^st May 2015, PZ reported revenues down 4.9%, but up 0.7% in constant currency with strong sterling, weak Nigerian Naira and weakening Australian dollar all involved. Pre-tax profits showed a similar pattern with a modest 1.9% drop at constant currency, but a 5.4% headline drop. Eps were 17.94p, barely changed from last year’s 17.96p. On the back on this the dividend was raised 3.1%, to a 2.2x covered 8p. This was a remarkable 42^nd consecutive year of dividend increase. Net debt jumped from £29.4m to £157.4m reflecting acquisitions (five:am, Nutricima jv buyout and PZ Nigeria stake increase from 70.55% to 72.8%) and higher working capital requirements in Nigeria. The latter increase being mainly a hedge against further currency devaluation after last year’s 25% drop. Despite the cash outflow, net debt was still only 1.2x EBITDA though.

Nigeria is a tough place to operate, but the long-term prospects are good providing the civil institutions can strengthen and flourish. The other African operations in Ghana and Kenya are smaller, but the opportunity is there is build out a more meaningful African spread of businesses over time. In this year African revenues grew 7.5% and operating profits by 5.3% (both constant currency). Both Australia and Indonesia showed good growth in constant currencies with the Asia division showing revenue growth of 14.0% although operating profit fell 6.7% due to competition in Australian homecare. In Europe revenues fell 14.2% in constant currencies (partly reflecting portfolio rationalization in Poland), but operating profits grew by 2.2%.  

Looking ahead, currency weakness will be a feature in FY2016, with Nigeria also facing imported inflation. Consensus forecasts are for a return to modest growth with eps of 18.6p, being a PE of 19.1x at 355p. Clearly the long record of dividend increases is a source of pride to PZ and dividend growth of 4% to 8.32p looks affordable in FY2016, resulting in a prospective yield of 2.3%. This doesn’t look overly cheap to me and the shares will react to sentiment (good and bad) on Nigeria and emerging markets in general. I wouldn’t buy today, but if you want regular dividend growth then it is hard to argue with 42 years and counting of increases. (Neil Cumming^, 21^st July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower