PZ Cussons: dividends of debt free operation
For shareholders of PZ Cussons Nigeria, a pleasant surprise of an interim dividend is starting up the new year. This is the reward for management's strategic move to keep the company's balance sheet entirely free of interest bearing debts.
Debt free operation has successfully shielded the business of the conglomerate from the destabilising effects of high interest rates in the economy. By positioning the company as a net lender in the high interest rate environment, the company is effectively tapping the opportunity for exceptional growth in interest earnings.
To these developments, the company has added an effective cost control, which has permitted even a moderate improvement in sales revenue to flow down into the bottom line. The innovative management changes in the company's operating structure are paying off by way of a big leap in profit and the company's governors are passing the gains down to shareholders.
PZ Cussons is one of the few companies that have been able to develop new strengths out of the difficult operating climate here. The results of the second quarter operations ended November 30 2013 reflect the strength of being able to raise net profit by 53% from less than 5.0% improvement in turnover. This was achieved by keeping cost of sales down and reaping a windfall from interest income.
Sales revenue improved by 4.7% to N32.46 billion at the end of the second quarter compared with the corresponding figure in the preceding year. Sales revenue growth is expected to step up in the second half of the financial year, having accelerated from the first quarter figure of N15.07 billion.
Full year projection indicates a turnover in the region of N75 billion for PZ Cussons in the 2013/14 financial year. This will be an improvement of 5.1% over the full year sales revenue figure of N71.34 billion in 2013.
The company recorded a marginal decline in sales revenue in the preceding year, ending a two-year recovery process in 2011 and 2012. Revenue performance has been generally constrained in the past four years and the company has not been able to match its revenue peak of N80.97 billion achieved in 2009.
Amid the revenue growth constraint, the company has been able to create a favourable operating cost environment that provides operating stability and permits wealth creation for shareholders. A major favourable cost behavior during the review period is a flat growth in cost of sales, which amounted to N23.51 billion at the end of the second quarter. That permitted an improvement in gross profit margin from 24.7% in the corresponding period in 2012 to 27.6% at the end of the second quarter.
One major cost element however failed to moderate and grew well ahead of sales revenue. That is distribution/administrative expense, which increased by about 9.0% to N6.16 billion at the end of the second quarter. There was also a setback in other income, which declined by 17.7% during the period.
Both the increase in distribution/administrative cost and the shortfall in other income were more than compensated by a windfall from interest earnings. Net interest income advanced by about 177% to N224 million during the review period. The figure is almost matching the net interest income of N229 million the company earned in the entire 2012/13 financial year.
The company's after tax profit amounted to about N2.32 billion at the end of the second quarter. This is an improvement of 52.9% over the corresponding figure in the preceding year. The company had reported a net profit of about N920 million at the end of the first quarter, which more than doubled in the second quarter.
Based on the second quarter growth rate, full year net profit is projected at N5.3 billion for PZ Cussons in 2014. With that, the company is looking forward to sustaining profit recovery for the second year. It had made a strong recovery last year when net profit more than doubled after a two-year drop.
The projected profit figure indicates a likely growth of 9% in net profit attributable to the owners of the company in the current financial year. The company's peak profit record so far remains the N5.58 billion it posted in 2010. There is a strong gain in net profit margin from 4.9% in the corresponding period in 2012 to 7.1% at the end of the second quarter. It is also an improvement from a net profit margin of 6.1% in the first quarter.
The robust growth in interest income reflects the availability of huge cash-based resources at N6.61 billion at the end of the second quarter. Trade creditors and other payables are providing significant interest free credit at N18.05 billion while trade debtors and other receivables dropped by 21.1% to N16.17 billion during the first half of the financial year.
The company earned 58 kobo per share at the end of the second quarter against 38 kobo in the corresponding period in the preceding year. Earnings per share is projected at N1.33 for PZ Cussons in 2014. The company paid a dividend of 86 kobo per share for its 2012/13 operations. It has proposed an interim dividend of 19.91 kobo per share in respect of which the register of shareholders will close between 3 – 4th February. Payment date is scheduled for 12th February 2014.