PZ Cussons Plc

PZ Cussons Plc (LON: PZC) is a consumer products company. The Company operations are divided into four categories being Home Care, Personal Care & Beauty, Electricals, and Food & Nutrition.

Rationale for Valuation – Sell at GBX 253.50

• The Company is trading near a 52-week high, raising doubts at the upside potential at current level.
• Moreover, the Company’s P/E, EV/EBITDA, and P/CF multiples are significantly higher as compared to corresponding multiples of the Personal & Household Products & Services industry, reflecting overstretched valuations.
• The stock has underperformed the index (FTSE 250) during the last five years period and delivered a negative return of 18.03% in the last five years.
• The operating landscape remains highly volatile with the continuing uncertainty of the COVID-19 pandemic, UK market moving into recession, and categories remaining highly competitive.
• From the technical standpoint, 14-day RSI stood at ~60, which means the stock price could decline in the short term.

Key Risks

• The volatility in the prices of commodities and raw materials can affect the operational margins.
• The Company has limited suppliers from where it sources the strategic raw materials and any breakdown in the supply, especially considering the risk from Covid-19 and Brexit, would result in the Company's inability to manufacture and satisfy the customer demand.
• Moreover, there is a shift in consumer demand with channel closures due to lockdown.
• The government has announced a series of stimulus, the next wave of the outbreak could be a catastrophe, especially for the non-essential and discretionary product retailers.

Recent News

On 1 October 2020, the Company announced that it had completed the sale of the Nutricima dairy business in Nigeria to FrieslandCampina WAMCO.

Trading Update (for the first quarter ended 31 August 2020, as on 23 September)

(Source: Company Website)

• PZ Cussons has a robust balance sheet and liquidity position, with decrease in net debt (against the year-end).
• The Company witnessed a decent performance in Q1 FY21, with revenue growth of 23%.
• It has also shown growth in all three regions and an improvement in profitability.
• It has delivered an excellent performance in Indonesia and the UK.
• The Company saw the results recovery in Nigeria, Australia, and Beauty.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In Q2 FY21, the Company plans to increase investment in building the brand and capabilities. The operating landscape stays highly volatile, with the continuing uncertainty due to the COVID-19 pandemic. Hence, it remains difficult to provide guidance. Further, the Company expects some adverse headwinds for the rest of the financial year 2021. PZC works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. It is advisable to book profit now and reinvest the amount of principal and gains at the right time and price. The stock made a 52-week low and high of GBX 149.00 and GBX 265.24, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on PZ Cussons at the current price of GBX 253.50 (as on 20 October 2020, before the market close at 8:43 AM GMT+1), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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