Monday 18 December 2017

Why a long-term investment in Cussons might just wash with me

Share watch with John Lynch

Cussons is a producer of soaps, shampoos, gels, detergents and beauty products
Cussons is a producer of soaps, shampoos, gels, detergents and beauty products

John Lynch

For the length of human history there's been an unending search for knowledge of what the future holds.

From the Oracle in ancient Greece right down the millennia, people have had an insane belief in prophesy. Not surprisingly in the 20th century forecasting became a business for hot-shot economists

These modern Oracles declared a decade ago that the American dominance of the world trade would decline and the BRIC counties (Brazil Russia, India and China) would take over. Finding forecasting to be an imprecise science, there has been some reassessment of this judgement and BRICs have now been joined by the MINT countries (Mexico, Indonesia, Nigeria and Turkey) as being the economic superpowers of the future. Hitching a lift on a superpower has always been an ambition of mine so I went searching for a likely candidate to carry my modest punt. I might have found it with an African-based multinational called PZ Cussons, but with some caveats.

Founded in 1879, Cussons is a producer of soaps, shampoos, gels, detergents and beauty products. It is also involved in electrical products, and has two joint ventures; one in palm oil with the Singapore based Wilmar International and the second Nutricima with the Irish foods giant, Glanbia. It's a diversified business covering Africa, Europe and Asia and is listed on the London Stock Exchange, with a market value of £1.5bn.

Cussons is long established in Africa, and has been doing business there for over 100 years, with operations in Nigeria, Ghana and Kenya. Nigeria is its biggest market. I'll confess Nigeria would not be the first country on my list of proposed investment locations with its reputation for corruption and civil unrest. Yet for Cussons, Nigeria is a key driver of growth and accounts for 80pc of the £360m African revenue. The company's deep roots in Africa enable it to manage the chaotic distribution system. It sells its detergent by scoops for resale in shops and market stalls, in addition, its branded soaps (Imperial Leather) and detergent (Zip) are popular. The company continues to invest in Nigeria and has recently completed a palm oil refinery for edible palm oil and can now provide affordable safe bottled palm oil; a first in Nigeria. Its second joint venture is with Glanbia providing nutritional beverage using brands like Nana, Coast and Yo.

Cussons business is not confined to Africa. Its European sales at £316m are just behind those of Africa but accounts for almost two thirds of group operating profits. The UK accounts for almost £200m of European revenue, with brands like Imperial Leather, St Tropez tanning products, Cussons baby powder and Carex hand wash.

Its Asian business accounts for £180m revenue. The company operates in Australia, Indonesia and Thailand. Cussons is involved in another MINT country, Indonesia mainly in baby food, which accounts for 80pc of its sales. In Australia the company makes and markets its main brands in soap, detergent and beauty products. Recently Cussons bought Rafferty's Garden, an Australian baby food producer, and plans launching it in the growing baby food markets in South-East Asia.

Cussons has a healthy balance sheet, strong sales, profit growth, with revenue in 2014 of £860m and operating income of £125m.

However it faces currency headwinds particularly with the collapse of the Nigerian Naira due to falling oil prices. Europe contributed £77m to group income. Africa in spite of higher revenue contributes only 28pc, Asia making up the remainder. Cussons shares traded below 200p in 2009.

They currently trade in the 370s, below its yearly high of 440p. Investors are concerned not only with emerging markets currency but with the social unrest in Northern Nigeria, but Cussons prime position affords it the benefit of providing a major barrier to any new entrants.

The shares trading on 19 times forecast earnings are not attractive and while Cussons provides a low risk entry into emerging markets, and is a reasonable long-term prospect, but at this time is best avoided.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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