Why one good year for PZ Cussons doesn’t mean a turnaround has been established
Just a short email today as I really need to knuckle down to some analysis, and I am still struggling with a dodgy internet connection – not an ideal situation when starting an internet business, but that’s rural broadband for you.
I’m actually working on a write up of the consumer staples discussion Phil and I had on our first podcast, mainly because we wanted to show off the lovely sector cheat sheets we’ve put together. One company you’ll find in the cheat sheet is PZ Cussons, which released some seemingly good numbers today – full year pre-tax profit for the year to 31 May 2021 more than tripled to £63.2m on strong organic revenue growth in its core categories, not least of which is its hygiene division, home to brands such as Imperial Leather and Carex soaps. That was accompanied by some very strong cash generation and a nice bump to the dividend.
Unfortunately, the shares took a tumble as a separate statement released alongside the results revealed that revenues in the hygiene division have gone sharply backwards in the first few months of the current financial year. Carex sales appear to have dipped 24 per cent.
I am surprised the market was surprised by this addendum, though. 2020/21 has been a bumper year for soap sellers for the obvious reason. Now that the fear of Covid is winding down as vaccination rates rise, people are buying less of it, and certainly not going out on long, late-night missions to find the last dispenser of anti-bacterial soap in Essex. OK, so Carex remains the UK’s number one hand sanitising product – but the category’s boost was always going to be a short term one.
The latest figures may bring some improvement to the valuation metrics we’ve compiled in our sector cheat sheet, where PZ sits at the bottom of the pile on key measures including Return On Capital Employed (10.3%) and Operating Margin (11.3%). The company has been busy streamlining the business over the past year, focusing marketing expenditure on its ‘Must Win’ brands, consolidating suppliers and disposing of food divisions, including its African dairy business, Nutricima, which resulted in an £40.7m loss on disposal.
That renewed focus means PZ is a somewhat different business to the one whose shares were languishing at multi-year lows at the beginning of the pandemic. But with supply chain and inflationary battles to fight too, and a heavily promotional trading environment that might see it struggle to push through price hikes, it’s hard to see any consistent turnaround coming here. A bid may be the best hope investors have for these unloved shares, but such speculation is hardly a reason for buying into a business that simply hasn’t offered the dependency of giant rivals in the consumer staples industry, and still has a lot to prove from its new strategy.