Consumer goods group PZ Cussons (PZC) posted a positive third quarter trading update highlighting strong sales momentum as the Carex-to-Morning Fresh maker successfully increased prices to help counter inflation and protect margins.
Reassuringly, the FTSE 250 company also left its 2022 outlook unchanged, although the market reaction was rather muted.
PZ Cussons’ shares improved a modest 2% to 204.5p amid concerns over the future earnings impact of soaring input costs and the global consumer spending squeeze.
‘MUST WIN BRANDS’ HAVE MOMENTUM
For the quarter ended in February, the Original Source-to-St. Tropez maker reported an acceleration in group like-for-like sales growth to 8.5% with sales 13.9% ahead on a two year like-for-like basis.
Sales of PZ Cussons’ so-called ‘Must Win Brands’ improved from negative to flat in the quarter, with sales up 12.6% versus two years ago.
Among these, sales of Carex remained negative year-on-year as it lapped Covid-boosted comparatives, although the brand continues to gain market share with sales above pre-pandemic levels.
Also supporting the Must Win Brands’ performance was a good showing from Morning Fresh in Australia, double digit growth from Original Source and strong sales of Premier in Nigeria despite price increases ahead of the competition.
AFRICA RECOVERY CONTINUES
In terms of the geographic performance, there was a 5.3% like-for-like sales decline in Europe and Americas, impacted by Carex and St Tropez supply challenges in the USA.
Asia Pacific like-for-like sales increased by 4.3% and the recovery in Africa continued apace with like-for-like sales up an impressive 25.8%.
INPUT COSTS ESCALATE
PZ Cussons’ chief executive Jonathan Myers conceded the external environment was ‘amongst the most challenging many of us have seen. Input costs have continued to escalate in recent weeks, and it is likely that household budgets will soon come under pressure. Our teams are working hard to address both of these dynamics.’
Myers continued: ‘We are removing costs that the consumer does not value, and have plans in place to meet evolving consumer needs, including innovation to offer everyday great value as well as more premium-priced launches. While the coming months will continue to be challenging for us and the wider consumer goods sector, the strength of our brands and our strategic progress gives me confidence in the long term prospects for the business.’
BROKER VIEWS
While it has to absorb soaring input costs, PZ Cussons insisted that with mitigating actions in place the impact on results for the year to 31 May was ‘likely to be limited’ and it expected to deliver adjusted pre-tax profit ‘within the range of current expectations’.
Following the robust update, Shore Capital left its forecasts for 2022 unchanged, looking for pre-tax profits of £65.5 million and earnings per share of 12.9p.
However, the broker reiterated its ‘hold’ recommendation and placed its 2023 estimates of £69.1 million of pre-tax profit and earnings per share of 13.6p ‘under review for downward revision’ due to the fact PZ Cussons faces ‘strongly rising input costs’ and a global consumer ‘under increasing pressure’.
With a ‘buy’ rating and 340p price target, Investec continues to view PZ Cussons as ‘significantly undervalued’.
The broker commented: ‘Costs have continued to increase in line with global trends, but cost cutting and pricing actions taken have helped keep the group on track with the current range of expectations.
‘There is no change to our forecast for full year pre-tax profits of £65 million compared with the consensus of £65.5 million. For the year to May 2023, the group will continue to focus on mitigating inflation, and we leave our numbers unchanged today with pre-tax profit at £68.4 million, which is also in line with consensus.’
