PZ Cussons achieves third year of revenue growth, but warns on Nigeria devaluation

PZ Cussons, the Manchester consumer products group, said a currency devaluation will impact its Nigerian operations, but in the long term should reap rewards for the group.

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.”