MIDAS SHARE TIPS: Imperial Leather maker PZ Cussons could clean up

Soap star: PZ Cussons, which makes Imperial Leather and Sanctuary Spa items, is a stock market bargain

Soap star: PZ Cussons, which makes Imperial Leather and Sanctuary Spa items, is a stock market bargain

If you haven’t had a bath recently, you’re not alone. As the cost of energy has soared and disposable income has fallen, companies that rely on us washing frequently have found themselves in hot water.

Britain’s bathing downturn has put the shareholders in PZ Cussons into a lather. The company’s top brands include Imperial Leather, Sanctuary Spa and Original Source, and despite the launch of a budget brand (Cussons Creations), the business is suffering from our soap-dodging ways.

Chief executive Jonathan Myers says UK consumers aren’t only bathing less, we’re giving fewer smellies as gifts as well.

On the bright side, though, we’re still willing to pay out to pamper our infants, with new babywash acquisition Childs Farm a brighter spot for the business.

PZ Cussons isn’t only interested in the UK. The company began as a commodity trading business in Sierra Leone, shipping animal hides and palm oil home to Blighty in the late 19th Century. Despite a change in focus, it has built on these international roots, and today its top target markets outside Britain are Nigeria, Indonesia and Australia.

Some of these markets are struggling too, with Indonesians feeling the financial pinch and buying fewer products with which to bathe their babies. Meanwhile Nigeria’s decision to abandon its currency peg has resulted in the biggest ever fall in its currency, the naira, which is affecting PZ Cussons’ profitability and ability to forecast future performance.

The naira hit new lows this week. Every 10 per cent fall in the value of the naira results in a £23 million reduction in PZ Cussons’ turnover, and a £3 million reduction in its operating profit. You would have to sell a lot of soap to compensate.

This explains some of the fall in PZ Cussons shares, which, at £1.42, are down 26 per cent over a year or 37 per cent over five years.

Given the company is trying to emulate the strategies of brand powerhouses such as Unilever, which is down less than 1 per cent over five years, and Reckitt Benckiser, which is down 16 per cent over the same period, PZ Cussons shareholders might feel hard done by.

Full-year figures, published on Tuesday, were a mixed bag. Turnover was up nearly 11 per cent year-on-year, while unadjusted pre-tax profit was down 4.2 per cent at £62 million with a 27 per cent decline in earnings per share.

This was partly due to a £16.5 million fall in the value of the Sanctuary Spa brand, which is struggling to tempt cash-strapped households back to the bathroom, and also because the firm has spent money on improving supply chains.

The company’s cash position is confused by the fact that it has £200 million stuck in Nigeria that it is struggling to repatriate, while an increased non-controlling interest and tax charge in Nigeria also pushed down profit before tax.

Cussons is doing its best to simplify things in Africa, intending to delist PZ Cussons Nigeria and buy out its minority shareholding using the naira balance it has there.

There was good news from Childs Farm, up 12 per cent year-on-year, and there was strong performance in Australia and New Zealand. And the management has held the dividend at 6.4p.

For investors, the question mark over PZ Cussons is whether the team’s transformation will bear fruit, and whether it can withstand the international uncertainty.

The company is at the mercy of many factors outside its control, and inflationary pressure may increase again worldwide if crude oil prices continue to rise.

On the plus side, the positive acquisition of Childs Farm and continued supply chain improvements should drive growth, while, despite currency difficulties in Africa, sales are proving resilient.

Myers believes that the launch of budget brands and an increased focus on at-home ‘spa experiences’ to combat the cost-of-living crisis will help PZ Cussons to solve softening sales.

Investors will need to weigh up the pros and cons.

Midas verdict: A bubble bath is meant to be relaxing but investing in Imperial Leather has proved anything but. The firm’s woes seem to be easing, but problems outside its control mean that the Nigerian part of the company will continue to struggle for some time. 

However, a falling share price makes the company look attractive to new buyers. If you compare the firm’s stock market valuation with its predicted profits, you see that PZ Cussons is trading at 13 times forward earnings for 2024. This is far less than for the wider consumer staples sector (excluding tobacco) – a good benchmark – which trades at more than 20 times earnings. 

This suggests the firm may be undervalued. Dividends help to sweeten the deal too, with a yield of 4.5 per cent. PZ Cussons may be in hot water for a short time to come, but those with a long-term view may feel now is the right time to get in the tub.

Traded on: Main market Ticker: PZC Contact: pzcussons.com or 020 7257 2400

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

Read More

Leave a comment

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More