While a good chunk of my portfolio is allotted to companies housed in the FTSE 100, I’m always on the look-out for bargains in the broader FTSE 250 index. Often seen as a bellwether for the prospects of UK plc, over the long run this index has comfortably outperformed its more illustrious neighbour.
Consumer goods business PZ Cussons (LSE: PZC) might not be a household name, but it owns a number of well-known brands in the beauty and hygiene space. These include Imperial Leather, Carex, Morning Fresh and Original Source.
Turnaround
Over the past 10 years, its share price has been a secular decline. Unlike its larger competitors, such as Unilever and Procter & Gamble, revenues have consistently disappointed.
In 2020, the company refreshed the composition of its board. The following year, the CEO unveiled a new strategy centred around eight “must win” brands.
This strategy looks as though it’s beginning to bear fruit. Like for like revenues jumped 6.7% to £337m in the first half of 2023. This was driven by the acquisition of Childs Farm, a leading brand in baby and child personal care.
Growth trends
The company is still very early in its transformation journey. However, it operates in a number of structural high growth markets.
The beauty market continues to bounce back following Covid. In an age of social media and digital photography, consumers are placing additional importance on personal appearance. This is most notable among women, who principally buy such products.
The after-effects of the pandemic has created a significant awareness around personal hygiene, and in particular its relationship to health and well-being. One market that has witnessed explosive growth over the last few years has been hand sanitisers.
The global market for baby personal care products looks extremely attractive. In two of the company’s key markets, Nigeria and Indonesia, 12m babies are born annually. Indonesia’s total baby market alone is forecast to be worth £500m by 2026.
Risks
In the short-term, one key risk relates to the currency devaluation in Nigeria, its largest market. For the financial year 2023, it estimates that for every 10% devaluation in the Naira, revenue will decline by £23m and operating profit by £3m.
However, the liberalisation of Nigeria’s foreign exchange regime by its Central Bank will likely be favourable to companies operating there. Not only will it remove cash challenges, but economic reform should make the country more attractive to invest in.
For a company that has been struggling for so long the danger is that this latest transformation fails to deliver. However, with its share price languishing at levels lower than during the Covid crash, I feel the risk/reward ratio to be favourable for a buy-and-hold investor.
On top of that, I’m being paid to be patient. Today, the stock has a dividend yield of 4.1%. Given its growth prospects, I’m keen to lock in an attractive rate now in the expectation that payouts will increase in the years ahead. That’s why I added the stock to my portfolio in the last week.
