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PZ Cussons - ignore fund manager fear and buy

By Chris Bailey | Tuesday 24 July 2018


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


It is no huge surprise that today's set of numbers from PZ Cussons (PZC) are not the finest ever seen because it told us so forty days ago as I wrote up at the time HERE. Of course the actual publication of a set of full year numbers always provides further insights and information...but it is hard to sugar coat a 15% odd fall in profits, a nudging down of overall revenues, debt pushing out a bit and the c. 4% dividend yield only held.

So why should you be interested given since my tip - even adjusting for the dividend yield - the shares have gone nowhere fast? The real reason is centered on that wonderful investment fusion of big picture and small picture matters. When I am not writing up interesting larger cap shares for your perusal on this website, I spend a good deal of my time thinking about big investment themes. One of my favourite sources for contrarian thinking is to use a big and much-followed global fund manager survey...on the basis (naturally) that if fund managers are already highly optimistic or deeply pessimistic about something...then a lot is already factored in.

For much of the last year or two, the UK has been bottom of the pile. Can anyone guess what happened in June 2016 to induce such fund manager pessimism? Anyhow...less about the B-word. What has been truly fascinating in recent months is that the UK has been quietly going up the sentiment charts...and has been replaced at the absolute bottom by that wonderful catch-all of 'emerging markets'.

There are many reasons why the emerging markets are out-of-favour including fears about global trade trends, a higher value of the US dollar and specific challenges to growth in influential countries such as China. For PZ Cussons specifically, troubles in its influential and important Nigerian market have especially hung over the results - elsewhere in the UK fake tan scene or in the company's trading in Asia or even in a couple of other African countries, corporate life has been workable at worst, reflecting the company's range of good brands (St Tropez, Cussons, Imperial Leather).

Looking big picture at Nigeria, I see short-term uncertainty associated with an election next year but also the huge potential associated with a rising population, progressive urbanisation and the piecemeal development of a bigger consumer economy. Reading through today's statement, the company is doing absolutely the right thing by not slashing prices and going for no margin volume but 'to optimise further our overall product portfolio and to reduce our cost base'.

I think PZ Cussons has a bit of time given its other geographical exposures are a clear majority of the business plus the underlying solid brands noted above. Debt as aforementioned did push up, but at x1.5 depressed ebitda is manageable and I am not worrying about the dividend despite it being a touch uncovered. And then there is the valuation: a x12s EV/ebit ratio is light for a branded consumer staples play even adjusting for the caution towards emerging markets and the like.

My thoughts are still optimistic for this one. Look through the professional fund manager emerging market fear and look for opportunities to make some returns. In short I would buy right here, right now.


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