PZ Cussons has forecasted a higher full-year profit, encouraged by a strong fourth-quarter performance in Africa and improvement in the soap maker's margins due to price hikes earlier in the year.
In a trading update for the year to May 31, 2023, this
morning, the group said full year revenues are expected to be approximately
£655m, with like for like revenue growth in each of its geographic regions in
the fourth quarter. The update says it will achieve a third quarter of like for
like revenue growth.
Adjusted profit before tax for the year will be at least
£70m, – the consensus was £68.4m based on Bloomberg as at June 22, 2023 –
reflecting a particularly strong fourth quarter performance in Africa.
As anticipated, the Europe and Americas operating margin
returned to high teens in the second half of the year.
PZ Cussons said it welcomes the recent policy announcement
by the Central Bank of Nigeria to liberalise the foreign exchange regime which,
as part of a broader suite of economic reforms under the new government, is
highly likely to improve the longer term prospects for Nigeria and remove some
of the cash challenges faced by multi-national companies. This has, however,
resulted in a devaluation of the Naira since the announcement on June 14.
Every 10% devaluation in the Naira from the rate used to
translate the FY23 income statement is estimated to result in a £23m reduction
in revenue, a £3m reduction in adjusted operating profit, and a 0.5p reduction
in adjusted earnings per share.
Every 10% devaluation in the Naira from the closing rate
used to translate the balance sheet as at May 31, 2023, is estimated to reduce
the group cash balance, as reported in pounds sterling, by approximately £20m.
The devaluation of the Naira will also impact the
translation of US Dollar-denominated liabilities of the Nigeria business. This
adverse impact will be recorded within statutory profit or reserves in the
group’s financial statements in financial year 2024.
The group said that, while the devaluation of the Naira will
result in higher raw material costs for its Nigeria business, reflecting the
higher cost of US Dollar imports, it expects to largely offset this through
mitigating actions such as pricing, as successfully demonstrated over the past
two years.
Management believes that the group will be well placed to
withstand any macro-economic volatility in Nigeria given its market position
and the significant improvement in the profitability of the business there in
recent years.
It has moved from an operating loss in FY20 to an operating margin
of more than 10% in FY23, and it has strengthened local capabilities
substantially. The group said it is committed to improving the performance of
its Nigerian business further given the significant market opportunity and the
strength of its brands.
Chief executive, Jonathan Myers, said: “While the Naira
devaluation will have a one-off impact to the group’s near-term reported
financial performance, we believe the medium to long term prospects for our
Nigerian business will be much improved by the economic reforms, currently
being introduced by the new government, the likes of which have not been seen
for decades.
“More widely, PZ Cussons has delivered another year of
progress against a challenging economic backdrop. We have continued to
transform the business and build brands for the long term, while responding to
the day-to-day challenges of cost inflation and meeting the needs of the
cost-conscious shopper.
“This has resulted in a third consecutive year of like for
like revenue growth in FY23. We remain committed to delivering the benefits of
executing our strategy in the year ahead.”
Russ Mould, investment director at Manchester investment
platform AJ Bell, said: “At this point it might be fair to question exactly
what role Nigeria plays for PZ Cussons given it often seems to mar the
company’s updates.
“The country is a big contributor, accounting for nearly a
third of PZ Cussons’ revenue, but volatility in the currency and sometimes the
country itself often seem to be a problem and may prompt questions about
whether a sale of this part of the business could aid the long term stability
of the group.
“The latest issues in Nigeria, which relate to the
revaluation of the naira, detract from what is otherwise a solid update from PZ
Cussons.
“The company is on track for a third year of revenue growth
and the price increases it has been able to push through have supported an
improvement in margins and speak to the strength of a brand portfolio which
includes Carex and Imperial Leather.
“The company seems confident it will be a case of short-term
pain, long-term gain in Nigeria as the new government brings through economic
reforms. Time will tell.”