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Yesterday (18 September) the PZ Cussons (LSE:PZC) share price fell 15%. This is a big step a FTSE 250 a stock with a market cap of £385m. Yet despite the bad news of the big fall, I’m very optimistic about the long-term outlook for the business. Here’s why I’m thinking about buying the stock.
Problems in Africa
First, let’s get the bad news out of the way. The main reason for the decline was the release of full-year results. It may seem unusual for these to come out in September, but the company runs a fiscal year that ends at the end of May, and results are due out in September.
In the May-May period, business decreased by 19.6% compared to the previous year, profit before tax decreased by 39.7%. Even with this drop, it still recorded a profit of £44.7m. Total debt fell significantly from £251m at the end of May 2023 to £167m in May 2024.
In the report, its underperformance was blamed on the devaluation of the Nigerian naira. A business earns money in local currency by operating in the country. However it has to sell this and buy British pounds. So the fact that the naira depreciated by 57% during the year was a major drain on PZ Cussons’ income.
The impact of this is very visible. If we exclude Africa, the revenue generated by the same and decreased by only 2.6%.
Solutions from here
I understand that the decline in financial performance has scared some investors. However, the management team is taking action on this issue. They know that the performance of Africa will be bad not only this year but may continue. Therefore, it has already started discussions about selling it. The report noted that “the board has received many expressions of interest in the African business and it is possible that this could lead to a partial or complete sale”.
Until this happens, this business is focused on improving the availability of US dollars in Africa, which means that it should not work too much in the local currency. The value of the dollar does not change much, which means that earnings will not be affected much.
Putting all this together, I don’t see the performance of the Nigerian company as a problem if we fast forward a few years down the line. Outside of Africa, things are going well. The UK market is doing much better, with Carex posting a year of growth. Childs Farm’s first in-store launch in the US is also a boon for next year’s brand.
Being a value game
Let’s also not forget that many of the brands sold by PZ Cussons are consumer staples. This should work to make us a defensive stock that can do well in the event of a stock market crash.
The biggest risk I see is that I might be too early in buying the dip here. The stock is now down 49% over the past year. If the pessimism persists, I may hold unrealized losses for some time before having a chance to bounce back. Even so, I think it looks like a great value purchase for my portfolio.
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