PZ Cussons downgraded by Panmure on Nigerian currency concerns

27th May 2015 09:36

Broker Panmure Gordon has downgraded its rating on PZ Cussons to 'sell' as the surging shares in the personal healthcare and consumer goods group no longer reflect likely currency headwinds.Shares in PZ Cussons have risen around 20% to almost 370p since the start of the calendar year and though Panmure increased its price target to 325p from 310p it does not believe current consensus earnings forecasts for 2016 reflect recent currency movements.Although emerging market (EM) exposure is often denoted as a positive in terms of the long-term growth profile of consumer stocks, Cussons' considerable EM exposure will present some difficulties due to recent currency weakness in several of its markets.By far the largest currency impact will come from the company's significant exposure to Nigeria, which has seen its currency, the naira, slump to near an all-time low against the dollar. Cussons will also be hit by falls in Ghana's cedi, the euro, zloty and Indonesian rupiah, analyst Jonathan Leinster explained.Leinster estimated that Nigeria will represent roughly 40% of group sales and that, while recent elections appear to have resulted in a peaceful transfer of power, "there remain clear political and economic tensions and therefore the 'risk' profile is above average compared to the multi-national FMCG companies that have a large portfolio of EM operations"."We do not believe this is reflected in the current relative valuation of the stock against its peers."Based on his estimates of £796.5m sales, £108.2m adjusted profit before tax and 17.8p of earnings per share, Cussons shares have recently traded up to 21 times EPS for the year to May 2015 and offer a cash flow yield of only 3.6%, circa 10% lower than the average of the multi-national FMCG stocks.At the same time he calculated that adjusted EPS will be broadly unchanged between 2014 and 2016 primarily due tocurrency headwinds of circa 5% and 4% in the 2015 and 2016 financial years respectively.Therefore EPS growth will also be below the average of other major FMCG stocks.Although the FTSE 250 group remains a cash generative company, with undemanding levels of debt and a strong balance sheet, it will continue to grow the dividend 3-4% per year to 2016 despite expectations of no earnings growth.However the analysts said an estimated dividend yield of 2.2% was "not compelling".