PZ Cussons in Africa: Struggling, but not relenting

Dear Africa interested individuals:

                                                        I will start this off by saying that I am impressed with the honesty & transparency of PZ Cussons Nigeria and Ghana while taking a just below the surface level look at their audited financials.  The figures I examined, checked out and explanations were provided where necessary.  PZ Cussons Ghana did reveal more information than their Nigerian counterpart.  This is unlike the audited financials of Heineken in Africa that I recently wrote an article on.  Like I said once earlier, "If you do the right thing I will massage your head and if you do the wrong thing, I will pull your ears."  Now for the PZ Cussons story starting off with the bigger picture.  

The Africa region (comprises of Ghana, Nigeria & Kenya) recorded growth in revenue of 3.5% and net income growth of 1.6% for the fiscal year ended May 31st, 2015.  The Europe region had revenue growth of less than 1% and still was able to achieve net income growth of 16% year-on-year.  We see the idiosyncrasies of running a FMCG business in a frontier economy relative to a developed economy come to the fore.  The palm oil joint venture between PZ and Wilmar generated revenue of 225 million pounds for the fiscal period ended May 31st, 2015.  (Kudos to PZ Cussons UK for establishing this joint venture to diversify earnings especially as sales have stagnated in Nigeria since the end of FY 2008.)  In addition, Nutricima is now 100% owned by PZ Cussons.  I will focus on the operations of PZ Cusssons in Ghana and Nigeria only as they are the only two subsidiaries listed on the stock exchange of their respective countries.  Our journey kicks off with PZ Cussons Ghana.  

The CFO of PZ Cussons Ghana (a Ghanaian) resigned at the end of FY 2014 for personal reasons according to management.  Unfortunately, her resignation came at the time when debt spiked by 915% (nine hundred and fifteen percent) from June 1st, 2013 - May 31st, 2014.  Debt-to-equity spiked from 7% to 73%.  How personal or official these personal reasons are, we will never get to know; I wish her well.  I move on.  Ghana has had exceptional items on its books for FY 2013 and 2014; according to management the exceptional item is due to restructuring costs in respect of the closure of manufacturing operations of the company.  PZ Cussons Ghana made a loss for FY 2014 and is unfortunately on course for another loss in FY 2015 (due to be released within a month) based on the Q3 earnings release.  Why is this so?

During FY 2014, there were negative macroeconomic situations that took Ghana by storm (high inflation rate; inflation moved suddenly from 11% - 15% on average during the fiscal year, spike in borrowing rates and rapid Cedi depreciation) and (in my opinion) caught the management of PZ Cussons Ghana napping.  The harsh business operating environment and the actions (e.g. spike in trade rebates and advertising equivalent to 18% of sales and debt spike by 915%) taken by PZ Cussons Ghana to overcome these externalities led to an operating and pre-tax income loss for FY 2014.  The biggest cost pressure came from a 28% rise in raw materials costs due to a combination of Cedi depreciation and inflation.  

As at February 28th, 2015, management had returned operating profit back to positive territory.  Unfortunately, the 915% spike in debt from FY 2013 - 2014 led to an immediate, huge and ongoing interest burden on the floating-rate debt of the company.  This turned operating profit of $359,000 into a pre-tax income loss of $265,673 as at Q3 FY 2015.  The pre-tax income loss so far achieved during FY 2015 is due in my opinion to wrong decisions more than a tough macroeconomic business environment.  We hope that management has enough raw materials in inventory without any further need to import as the Cedi further depreciated by about 15% during Q4 FY 2015.  If not, the loss for FY 2014 may be exceeded in 2015.  Luckily, for PZ Cussons UK, Nigeria's revenue is about 8X more than Ghana and thereof, the impact on its financials will be minimal.  Now let us look at the bright side.

PZ Cussons Ghana has a lot more future growth potential than Nigeria ; its sales growth (18.25% relative to 3.9% for Nigeria over the past five years) is very impressive and its products have much better acceptance in Ghana relative to Nigeria.  Given the resources available to it, PZ Cussons Ghana generates sales in excess of 3X PZ Cussons Nigeria.  PZ Cussons Ghana is also able to sell its products at a better price than its Nigerian counterpart (who deals with massive importation of competitor goods.)  On a relative basis, direct (first-line) profit is 21.5% more in Ghana than in Nigeria.  Ghana also turns over its products 8% faster than its Nigerian counterpart with growing demand while Nigerian sales growth continues to remain a perennial chore that has not been dealt with.  To further buttress my point, sales at PZ Cussons Ghana grew by $3.6m while Nigeria only grew by $1.5m as at Q3 FY 2015 year-on-year!  

In terms of similarities, both companies are very liquid; excluding inventories, they still have more than enough assets to offset their current liabilities over the past two fiscal years.  Inventory in stock based on revenue is about the same hovering around 25% -26% for both.  That is all for operational performance similarities.  PZ Cussons Ghana spends more relative to sales than PZ Cussons Nigeria to sell its products; this is caused by its huge outlay (relative to revenue) on distribution costs which doubles that of PZ Cussons Nigeria.  Once again, let us take another 45-minute flight to Nigeria to see how that country is faring.

Overall, PZ Cussons Nigeria is not as transparent as PZ Cussons Ghana in terms of what it reveals about its operations through its audited financials.  PZ Cussons Nigeria is a lot more profitable on average (more than 2.2X) than its Ghanaian counterpart.  This is of course good news for PZ Cussons UK who typically relies on Nigeria for at least 30% of its global revenue annually.  The route to market in Nigeria for products is a lot cheaper than Ghana coupled with minimal finance cost and a more stable currency on average, has made the Nigerian subsidiary more profitable on a perennial basis.  Interestingly enough, the Director of Distribution Services retired at the end of FY 2014.  PZ Cussons Nigeria has no debt as at May 31st, 2014.  PZ Nigeria did borrow during the year and paid interest, but retired the total amount by fiscal year 2014 end.  I see the same scenario playing out in FY 2015.  

PZ Nigeria is the more stable, profitable and strategic company.  The Nigerian subsidiary will not wow you but, will also rarely knock you off your seat with a pre-tax income loss.  In terms of the future and potential for success, PZ Cussons Ghana is where you need to be; PZ Cussons Nigeria is in the mature stage of its business cycle while PZ Ghana is in the growth stage.  As at July 28th, 2015 (dollar for dollar comparison,)  PZ Cussons Nigeria is only 40% more expensive (absolute) than PZ Cussons Ghana in terms of stock price.  The present (6 - 18 months) lies with Nigeria, the future lies with Ghana where the stock has already gained 50% during the month of June alone.  It is up to you to choose your investment horizon.  I am all about the future where PZ Cussons Ghana tickles my fancy more where the upside far outweighs the current downside. 

                          Tell others to tell others about this blog; a new dawn is here.