Carex handwash
Carex-owner PZ Cussons suffered an 18% drop in sales amid further devaluation of the Nigerian currency / Image source: PZ Cussons
  • Nine quarters of like-for-like growth
  • Naira devaluation dents profitability
  • Dividend slashed by 44%

Consumer goods firm PZ Cussons (PZC) has slashed its dividend and warned on profits amid the further devaluation of the Nigerian naira, disappointing news that triggered a 20% share price plunge to a five-year low of 102.6p.

The earnings alert and payout cut from PZ Cussons raises questions over the decision to take full control of its Nigerian business, which speaks for roughly 35% of revenue, as volatility from the currency and the county itself has been a regular source of profit warnings from the owner of brands such as Carex, St-Tropez and Imperial Leather.

NAIRA NIGHTMARE CONTINUES

PZ Cussons posted a near-18% drop in sales to £277.1 million for the half ended 2 December 2023, of which more than £50 million was attributable to the Nigerian currency which has halved in value since June 2023.

On a statutory basis, the Manchester-headquartered firm lurched from profits of £40.5 million to a pre-tax deficit of £94.2 million after a massive £88.2 million foreign exchange loss.

With the naira some 70% weaker than a year ago, PZ Cussons now expects adjusted operating profit for the year to May 2024 in the £55 million to £60 million range, significantly below the £61.5 million to £68.2 million called for by consensus. And given the material financial hit from naira devaluation, the company reduced the half-year dividend by 44% to 1.5p.

WARNING MASKS MUCH PROGRESS

While disappointing, the latest earnings alert masked strategic progress from the Sanctuary Spa-to-Original Source supplier, which has now delivered nine quarters of like-for-like sales growth on the spin.

On a constant currency basis, first half adjusted operating profit was actually up 17.2% and all three regions (Europe and the Americas, Asia Pacific, Africa) delivered margin improvements.

Childs Farm, the baby and child personal care brand acquired in 2022, continues to grow strongly amid distribution gains in the US and Europe.

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Carex, the hand wash brand which boomed during the pandemic, exited the first half in growth and each of PZ Cussons’ UK personal care brands grew volumes in the second quarter, although the beauty brands’ performance has ‘fallen short’ of management’s expectations in recent months.

PZ Cussons’ deal to de-list and buy out minority shareholders in Nigeria is intended to further simplify and strengthen its business in the populous African nation and the company continues to target completion by the end of the financial year, subject to a number of local approvals.

WHAT DID THE CHIEF EXECUTIVE SAY?

Boss Jonathan Myers insisted PZ Cussons is ‘a stronger business than when we launched our new strategy, as demonstrated by our ninth consecutive quarter of like-for-like revenue growth and, on a constant currency basis, double-digit operating profit growth in the first half of the financial year. We have clearly had our challenges but have also delivered a turnaround in our UK Personal Care business and put in place measures to address the underperformance in our Beauty business.’

Numis Securities downgraded its year-to-May 2024 adjusted operating profit forecast by 19% to £55.5 million to reflect the recent further devaluation of the naira.

‘We continue to believe in the potential of PZ Cussons management to deliver a material transformation in the quality of earnings for the group but acknowledge recent Nigerian events have delayed progress towards this goal,’ said the broker.

Russ Mould, investment director at AJ Bell, said PZ Cussons is ‘constantly beset by problems with its Nigerian business, linked to the political instability in the country.

‘The recent devaluation of the naira has seen that story play out once again and must be severely testing shareholders’ patience at this juncture, particularly given the savage cut to the dividend.’

Mould continued: ‘The decision to take full control of the Nigerian arm last year is now cast in a far less favourable light and questions may now be asked about the long-term future of this part of the business within the group.

‘Nigeria has been a big contributor to PZ Cussons’ growth but its unpredictability has been a thorn in the side of the business for some time.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.

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Issue Date: 07 Feb 2024