Yesterday (18 September) the PZ Cussons (LSE:PZC) share price dropped by 15%. This is a big move for a FTSE 250 stock that has a market cap of £385m. Yet despite the bad news behind the sharp fall, I’m pretty optimistic about the long-term outlook for the business. Here’s why I’m thinking about buying the stock.
Problems in Africa
Firstly, let’s get the bad news out of the way. The main reason for the drop was the release of the full-year results. It might seem odd for these to come out in September, but the firm operates on a financial year that runs through to the end of May, with results out in September.
In the May-May period, the business saw revenue drop by 19.6% versus the year prior, with profit before tax falling by 39.7%. Even with this drop, it still recorded a profit of £44.7m. Gross debt reduced significantly from £251m at the end of May 2023 to £167m in May 2024.
In the report, the underperformance was blamed on the devaluation of the Nigerian naira. The business earns money in the local currency from operations in the country. Yet it has to sell this and buy British pounds. So the fact that the naira devalued by 57% during the year massively eroded revenue for PZ Cussons.
The impact of this is very telling. If we exclude Africa, like-for-like revenue only fell by 2.6%.
Solutions from here
I understand that the fall in financial performance has spooked some investors. Yet the management team are taking action. They knew that African operations would be a negative not just this year but potentially going forward. Therefore, it has already started conversations around selling it off. The report noted that “the board has received a number of expressions of interest in the Africa business and it is possible that this could lead to a partial or full sale”.
Until this happens, the business is focused on improving US dollar sourcing in Africa, meaning that it doesn’t have to deal as much in local currency. The value of the dollar is much less volatile, meaning that earnings won’t be impacted as much.
When I put this all together, I don’t see the company’s Nigerian operations as being a problem if we fast forward a couple of years down the line. Excluding Africa, things are going well. The UK market is doing much better, with Carex posting a growth year. The initial in-store launch of Childs Farm in the US also bodes well for the coming year for that brand.
Becoming a value play
Let’s also not forget that many of the brands that PZ Cussons sells are consumer staples. This should act to make it a defensive stock which could do well if we get a stock market crash.
The main risk I see is that I might be too early in buying the dip here. The stock is now down 49% over the past year. If pessimism persists, I could be holding an unrealised loss for some time before it has a chance to make a comeback. Even with this, I think it looks like a great value purchase for my portfolio.
