PZ Cussons sees sales stagnate, but the long-term story remains attractive.
Often when investing it's better to travel than to arrive -- even if you're a shareholder in a company with a strong presence in Africa, the last big frontier market.
Certainly that's been the case for investors in PZ Cussons (LSE: PZC), the soap to washing powder manufacturer that's notably big in Nigeria.
Ten years ago, PZ Cussons shares were yours for 34p, but by 2007 they'd surpassed the £2 mark. Enthusiasm for all things emerging then pushed them over £4 as 2011 got started.
The underlying business story at PZ Cussons has been admirable, too, with turnover increasing from £540 million to £772 million in the five years to 2010 and earnings per share up around 70% over the same period.
Cash flow has also been strong. Even when the company shelled out £62.5 million for the St Tropez tanning brand last year it still had net funds to spare.
Flat, not flattering
However, it's a P/E re-rating that really helped PZ Cussons towards its recent highs. Investors paying as much as 25 times for earnings expect blockbuster results. They were always going to be tough for a household goods manufacturer to deliver, especially given its strong performance in the prior year.
With today's half-yearly results to 30 November, the penny has dropped for those who got carried away with PZ Cussons' prospects. Specifically, 34 pennies have dropped, with the share price down 9% to 345p as I write.
Turnover was a feeble 1.3% higher at £375 million, while operating profit was ahead 2.5% to £46.2 million (or down slightly including a £1.7 million exceptional charge). Statutory earnings per share were stagnant at 6.7p -- these are not the numbers of a growth investor's daydreams.
Profit margins of 12% aren't great, either, for a company with supposedly strong brands -- Reckitt Benckiser (LSE: RB) is achieving around 24%, and even Unilever's (LSE: ULVR) margins are over 14%.
At least the interim dividend was lifted by the company's traditional 10%, to just over 2.1p per share. As mentioned, the company has net funds, too, of £12.5 million, counting all its current assets and cash.
Cautious and challenging
While none of PZ Cussons' markets delivered growth worthy of its giddy rating, Europe was the weakest link. Greece and Poland were especially tough, although at least the company says St Tropez is off to a good start in the UK. PZ Cussons other premium British brands -- Charles Worthington and Sanctuary -- are doing better than the cheaper stuff, too.
Performance in the exciting market of Nigeria (population: more than 150 million) was flat, which management blames on restrained bank lending and upcoming elections. Although PZ Cussons doesn't break out sales in Ghana and Kenya, it says they were ahead of last year. Asian revenues also advanced.
None of this is very inspiring, and anyone who paid a toppy price for PZ Cussons will find the outlook even more disappointing:
"We remain cautious about the trading environment for the remainder of the year, given continued high levels of promotional activity, particularly in the UK; a challenging outlook for the consumer in a number of markets; global increases in a number of commodity costs; and potential disruption to trading from the Nigerian election process."
Ouch! If anything that sounds more like a prelude of worse times ahead.
What price PZC?
On the other hand, if you're not already a shareholder in PZ Cussons then Tuesday's share price fall could be the prelude to an attractive opportunity.
As Maynard Paton, chief analyst at our Champion Shares PRO service, recently pointed out:
"PZ Cussons is a quality company with some exciting prospects overseas. But you can always pay too much for even the very best businesses. I'm hoping today's news of slower growth can 'de-rate' the shares further and offer a buying opportunity on a far more attractive P/E.”
What might that be? Normalised earnings per share are forecast to grow at 10 to 12% per annum for the next couple of years. Even after today's sharp fall, that puts the shares on a P/E of nearly 19 for 2012.
While I like PZ Cussons' market niche, its strong balance sheet, and its growth potential, that doesn't leave much room for error, as we've seen today.
With the IMF hiking its global growth forecast and PZ Cussons well-placed to benefit from the expanding middle-class in countries like Africa and Indonesia, it probably won't pay to be too greedy. If we look for a P/E of say 18 for 2011, falling to around 15 for 2012, then buying in at anything under £3 a share looks a decent bet.
At that price you're also getting a well-covered dividend yield of 2%, which isn't stellar but which has been increasing at a rate of 10% to 12% per annum for many years now. In fact, PZ Cussons has increased its dividend for more than 37 years!
That record underlines the attractiveness of buying into 130-year old PZ Cussons -- provided you don't overpay for that potential.
More from Owain Bennallack:
> Owain owns shares in Unilever.
