Baby food-to-bubble bath supplier PZ Cussons (PZC) is a notable faller on Friday, down 3.1% to 329.8p, as Canaccord Genuity analyst Eddy Hargreaves downgrades the stock from 'buy' to 'hold'.
Ahead of a full-year trading update (9 Jun), the analyst urges clients to book profits, highlighting an increase in the share price since late January as well as the potential for further trading disappointments.
In a note entitled 'High Enough for Now', the Canaccord Genuity scribe notes a 37% share price rebound since the interims (26 Jan).
'Helped by a 57% increase in the oil price over the same period (given the company's Nigerian exposure), the shares have outperformed the FTSE 250 index by 31% in the process,' writes Hargreaves, who would 'take profits in the light of the re-rating and the lack of a near term catalyst'.
Shares outlined the short-term risks facing Manchester-headquartered PZ Cussons, notably its exposure to oil-dependent Nigeria and some currency headwinds, in our Personal Goods sector report in January.
That said, PZ Cussons offers a compelling long-term play on brand strength and Africa's emerging consumer class, while a strong balance sheet enables it to invest in new growth avenues.
Acquisitions such as the Rafferty's Garden baby food and five:am organic yoghurt brands have augmented growth prospects in Asia and beyond.
In a note that has sent many investors heading for the exits, Hargreaves concedes Nigeria now accounts for just 25% of group profit, having spoken for as much as 40-45% three years ago.
But he warns: 'Visibility here remains limited, however, with further devaluation of the naira possible and Cussons continuing to have to buy dollars at a 50% – or higher – premium to the official rate; it imports some 80% of its Nigerian materials from overseas.'
Canaccord Genuity has moderated its growth assumptions for PZ Cussons' Africa division.
Hargreaves sees 'little prospect of a near-term rebound in its more economically sensitive electrical white goods business in Nigeria – despite a strong market share performance'.
Bulls will focus on the broker's insistence performance elsewhere continues to be strong.
'Growth in Indonesia (accounting for circa 10% of group profit, and where 80% of sales are in baby care) should continue at circa 8%, with this being boosted by the introduction of the acquired Rafferty's Garden premium baby food brand during calendar 2016,' says Hargreaves.
Furthermore, 'despite cycling the Imperial Leather relaunch, UK Washing & Bathing should remain robust with expansion of the Carex range, as should UK Beauty Care – driven by the St Tropez and Sanctuary brands.'
Fifty-three per cent controlled by the Zochonis family – the company can trace its origins back to 1884 when George Zochonis and George Paterson set up a trading post in Sierra Leone – PZ Cussons has increased its annual dividend for 42 years in a row.
And Hargreaves at Canaccord considers it 'highly unlikely' this will change at the full-year stage, particularly given its strong balance sheet.
For the year to May just-ended, Canaccord Genuity forecasts an improved dividend of 8.2p (2015: 8p), ahead of a rise to 8.8p for May 2017.
Adjusted taxable profits are forecast to reduce to £103.9 million (2015: £108.8 million) for May 2016, ahead of recovery to £111.5 million in the current financial year.