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Published On: Mon, Oct 9th, 2017

Patching up PZ


In the 1980’s and mid 1990’s PZ-Cussons was amongst the bluest of blue chip companies listed on the  (NSE), it was the cream on top of the conglomerate pie, but by the turn of the 2000’s rising competition, growing weariness and a

Michel Puchercos, MD, PZ Nigeria

general lack of spunk had caught up with the business leading to a company that was half past its prime. Nevertheless, the company’s recently released first quarter (Q1) 2017/2018 results tease the hope of a revival.

Cranking up operations

Operationally PZ is still in a bit of a bind. Gross profit margin slipped slightly from 35 per cent in the first quarter (Q1) of 2016/2017 to 32 per cent in the first quarter (Q1)2017/2018. The 8.6 per cent dip was as a result of rising cost of operations which reflected in a worsening foreign exchange situation as well as an increase in Sales General and Administrative expenses (SG & A’s), with administrative costs growing by a staggering 42 per cent. Meanwhile, operating profit slid by 16 per cent dropping from N2.2billion in Q1 2016 to N1.8billion in Q1 2017.

A good feature of the firms operations over the period was that its operating losses on foreign exchange transactions shrunk from N4.7 billion in Q1 2016/2017 to N1.8 billion in Q1 2017/2018. This, of course, was attributable to a more stable Naira to Dollar exchange rate in 2017 and improved access to foreign currency through the newly created Autonomous Foreign Exchange  window (NAFEX) created by the Central Bank of Nigeria (CBN) in April. Easier access to foreign exchange at rates reflective of market fundamentals has helped importers reduce losses they had incurred by buying FX at exorbitant costs on parallel market trading platforms.

The company’s shrinking net working capital (the difference between its current assets and current liabilities) has led to financing troubles as its interest costs skyrocketed by 267 per cent from N94.8 million in Q1 2016/2017 to N348.3 million in Q1 2017/2018.The family products manufacturer’s stroll to the banks has come at a heavy cost, especially since revenues have grown only by a mild 12.8 per cent from N16.8 billion in Q1 2016/2017 to N18.9 billion in 2017/2018. Says one industry analyst, ‘ the recent recession put a squeeze on sales and price adjustments leaving many local companies with the narrow option of doubling down on costs; but for PZ even this was a tough call as it remained heavily dependent on foreign imports’.

Cranking up operations may take the company a while as a lot will depend on consumer demand rising sizably, foreign exchange rates declining steadily and administrative and finance charges being reeled in. However, PZ has successfully cut back its post tax losses and appears set for a much needed season of profitability to give shareholders reprieve from the dark operational tunnel they have had to soberly navigate. Loss after tax fell from a remarkable N1.58 billion in the last financial year to a much smaller N123 million loss in the first quarter of the company’s 2017/2018 business year.

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De-freezing liquidity

PZ’s liquidity situation is not great but it is tolerable. The company’s grew from 1.6 in Q1 2016/2017to 1.5 in Q1 2017/2018. This reflects the fact that the company has one and a half times its current liabilities covered by its current assets, leaving a slim wriggle room for the company to meet short term obligations if its liabilities go up for any reason. A ration of 2 would have left investors a lot more comfortable, especially at a time of slow economic growth. Indeed PZ’s liquidity looks a jot darker when stocks of unsold goods and raw materials are removed from its current assets; the liquidity ratio dips to 0.7 in 2017/2018 down from 0.8 in 2016/2017, suggesting that quite a significant quantity of the company’s recent current assets are stacked up in its warehouses.

The shrinking of the company’s operating capital (its net working capital) from N18.2 billion in Q1 2016/2017 to N17.9 billion in Q1 2017/2018 reinforces concerns over declining company liquidity. But countering the problem is the company’s reduction in receivables (in other words debts owed to it) as its receivable days (the time it takes to get paid for sold goods) fell from 41.3 days in 2016/2017 to 39.4 days in 2017/2018, indicating that the business managers are reining in credit sales and pulling in cash. PZ has had problems with its cash flow since the beginning of last year as its cash flow dipped from a positive figure of N10.54 billion in 2015/2016 to a negative cash flow of N4.85 billion in 2016/2017. Over the first quarter of the 2017/2018 financial year the company has seen its cash and cash equivalents drop from N8 billion in Q1 2016/2017 to N2.2 billion in the contemporary period of the new accounting first quarter. If PZ is to end the current accounting year on a favourable note it must defreeze its liquidity situation by reducing its current liabilities and increasing its cash. This is no easy task as PZ’s corporate revenue growth depends heavily on an increase in consumer incomes which is not likely to happen in the last quarter of the year.

The good and bad debt news

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The good news about debt for PZ is that it does not have any large long term overhang. A long term debt liability seems nonexistent. Nevertheless the company does seem to be chalking up a sizeable short term borrowing liability from local banks. The company’s Q1 2017/2018 bank borrowings rose from none in 2016/2017 to a thumping N1.5 billion. The rapid rise in short term bank loans could either mean a spike in business requiring more short term funds to cover imports or a tightening of cash needed to meet normal operational expenses. If the problem is one of meeting normal operating expenses then the real challenge would appear to be growth in inventory or slow moving stock. The company’s inventory days (the average days it holds stock of goods) rose from 196.8 days in Q1 2016/2017 to 198.2 days in Q1 2017/2018. This does appear to be a strong enough reason for the company’s borrowings to escalate so fast and so high but it could explain part of the increase in the manufacturers short term bank loans.

Recession and its hard knocks

PZ’s 2017/2018 results will look a lot healthier than its previous year end but there are still serious worries about its sales growth and inventory stock increase. Sales of refrigeration and air conditioning appliances are not expected to grow significantly over the next nine months as recessionary headwinds remain despite a technical reversal. The economy by half year 2017 had grown at a positive 0.55 per cent as against a negative 1.5 per cent in 2016. The growth is still fragile as any dip in oil prices or oil volumes (Nigeria currently exports about 2 million barrels per day) could topple the revenue apple cart and drag the economy back into negative growth.

Real disposable incomes are still low as inflation remains in double digit (recent figures puts it at 16.01 per cent) and job loss figures are high meaning aggregate consumer demand is muted. Refrigeration and air conditioning are luxury goods and in recessions they suffer a major hit. Nevertheless, other products of the company such as its soap and detergent and home cleaning products may still show decent sales demand and reduce the severity of the impact of a demand slump on the company’s revenue.

With all said and done PZ will still have to cope with a difficult financial year, but if inflation rappels down and consumer real incomes recover during the year, the company could still end the season on a decent note; a refrigerator must just be the right boon to have at the end of blistering financial strain.




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