Trade idea of the day Is PZ Cussons decline a buying opportunity

The previous session saw PZ Cussons drop 15% across the day, including a drop of 25% at one point to its lowest level since 2009 as investors digested a profit warning from the group. Despite only in January, pointing to an improved second half to the financial year, just a month and half later the company lowered its full year profit expectations to £80-£85 million, rather than the previously expected £100 million.

Conditions in the UK market are in no uncertain terms unforgiving and continue to present challenges, with sales down in the soaps division. Meanwhile Nigeria, PZ Cussons other principal market had been hit on all levels, but particularly the milk business by competitor pricing. The story is the same in both markets – cash strapped consumers seeking out cheaper alternatives amid high inflation. Given the essential nature of the products it produces, it is surprising that it is being affected so heavily by the squeezed consumer – usually we would expect this response towards discretionary items.

Whilst this is not the first time that profits will have declined year on year, it is the biggest one-day decline in the value of the share price and takes the share price decline to 37% since July 2017. On the positive side, the balance sheet is still strong. Debt to earning ratio is at 1.3x which means that dividend looks comfortably covered. PZ Cussons paid out 8.3p in 2017 which equates to a 3% yield on the stocks. Broker price targets are still elevated averaging at 336p, a 46% uplift from its current price of 230p.

However, we remain cautious, whilst the picture for the consumer in the UK should improve with falling inflation across the year, Brexit uncertainties make any prediction of recovery very difficult. Add to this the fact that any recovery in Africa is even more challenging to predict as high cost inflation has been a problem for years.

PZ Cussons is in turnaround mode and changes are being made. However, cost benefits for these changes aren’t due to be reflected until 2019. Although bargain hunters might consider PZ Cussons 15% drop a good buying opportunity, we would hold out for the time being.

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