Premier Foods And PZ Cussons - Two Consumer Defensive Turnarounds

7th Jul '20 by Jack Brumby

8 comments 5439 reads

Some of the best companies in the world can be found in the Consumer Defensives sector. They make things people need like food, drink, and soap. It’s a solid place to look for long term opportunities.

In fact, head over to the Browse section and you’ll see that the Consumer Defensives sector has one of the highest average StockRanks of all the sectors:

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Two interesting candidates aren’t so much high flyers giants as unloved contrarian turnarounds, though. Premier Foods (LON:PFD) and Pz Cussons (LON:PZC) : two companies with long operating histories and strong brands that have fallen from grace. The question is can they bounce back?

Judging from its share price chart, the Premier Foods recovery is already under way. PZ Cussons, on the other hand, continues to languish at its lowest share price in a decade but the community has been buying:

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Clearly some people are betting on PZC reviving its fortunes. With operations dating back more than a century and supported by strong consumer goods brands, I can see why.

Let’s take a closer look - first at Premier Foods with its gravity-defying share price, and then at PZC to see if there is any readacross.

Premier Foods (LON:PFD)

Share price: 77p
Market cap: £662.45m
1y relative strength: +148%
StockRank: 97

(I hold)

For a long time, Premier Foods was just too risky for many investors. Companies change though. Sometimes perceptions take a while to adjust to those operational and financial improvements - I think that might be happening here.

After years of being dead in the water at between 30p and 40p, the shares are finally turning. Look at the chart and you can see something’s happening - the shares have nearly trebled in about three months on historically high volumes of buying activity:

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Premier Foods is materially de-risking itself and there is a clearly identifiable share price catalyst. This clear and transformational catalyst is a ‘landmark’ pensions agreement that should make its shares far more investable for many participants...

Unlocking value at PFD step 1: debt reduction

There are two big weights holding PFD down: the group’s debts and its pension funds. Prospects are improving though. The company has strung together 11 consecutive quarters of UK sales growth and net debt to EBITDA is now 2.7x.

…

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LeopoldAlcocks

7th Jul '20

Hi Jack, thanks for the article.

I've also looked at PZ Cussons, but only briefly.

Strikes me that the incoming management team will have opportunities.

For example, one of the Nigerian businesses seems to make household appliances. Does that fit within the portfolio? Maybe not

I see potential for the business to be broken up in a way to benefit shareholders.

As you have pointed out, the main issue is Nigeria and the tough environment there for consumers.

That's outside the company's control and is a good example of the risks of doing business in less economically stable markets. However, should things improve, Nigeria should be an excellent place to provide growth.

Like you say, one for the very long term. And I would suggest only if you have a high risk tolerance

It's one I intend on examining further

Jack Brumby

Good point, speaking of breaking up parts of the business I did see PZC has recently offloaded some Polish operations

"The proposed sale of Nutricima and the sale of Luksja are further steps forward under our 'Focus, Scale and Accelerate' strategy, as we continue to streamline the Group to focus investment on core Personal Care and Beauty brands. This will enable us to deliver higher margin earnings, in geographies which can scale, and support the return of the Group to sustainable, profitable growth."

It feels like there is plenty more to be done in order to arrest the decline. Maybe more disposals are in order. I know from PFD though that this kind of thing can take a long time to execute successfully but I'm interested to see how it goes.

The brands look like they have potential but I've got plenty to catch up on if I am either to prove or disprove that impression...

aflash

Lindsell Train invested heavily in PZC in March. I hold through them.

Berksbee

8th Jul '20

Good analysis Jack. I hold PZC. Carex seems to be at the end of most aisles in Waitrose and the obsession with hand-washing will not be temporary so I think that bodes well. Additionally if Nigeria (ever) manages to sort itself out PZC is very well positioned - but that is more a wish and hope.

brucepackard

Thanks - I wrote something about the "voluntary disclosure" at PZC and how voluntary disclosure changed over the years. To be honest, I found that they had been very open about challenges they have faced, for instance:

Warning early in 2012 about the State of Emergency in Nigeria and it’s effect on their business.
Later, in July 2013, when the share price was at 400p (close to it’s all time high), the Outlook statement was warning about that the companyfaced “difficult trading environments in most of the geographies in which we operate”.

bench2

9th Jul '20

Back in the 1980's Paterson Zochonis was a tightly held private client stock for people in the know who lived near Manchester . The company was once booted out of the FTSE All-Share Index under the lack of turnover rules , it was always a cheaply rated stock ( circa 5x PER ) because of the large percentage of earnings from Nigeria . This was a cornerstone holding for John (now Lord ) Lee along with Nichols Vimto ......... both were 10 baggers for him . It was viewed and rated for a while as a mini Unilever , and their oldest soap brand Cussons Imperial Leather is a classic and still going . I can see why Nick Train is buying as he Takes a 10-20 year view , but it could be dead money for a while .

Zipmanpeter

I used to work for PZC in Nigeria (10 years ago) and their issues there are deep-seated and not really related to the current problems in Nigeria.

They have failed to invest (esp in brands) or be modern like the multi-nationals or be agile and aggressive like some of the new entrants to the market focused on the mass market end, especially in respect of updating their distribution systems (which are absolutely key in Nigeria). So whilst they used to have many regionally market leading brands in both Home Care and Health & Beauty, they are living off past glories. For example, they have almost completely lost their footing in Soaps & Detergents with only Morning Fresh Dishwash still strong in Homecare (albeit under pressure) in HomeCare. Similarly in H&B, great old brands like Imperial Leather have lost presteige and face issues as packaging formats change. Canoe was a leading unwrapped bar soap until the late 90s but is now struggling.

In Electricals it survives as the local distribution arm of (Chinese) Haier; it does not control its destiny. Its Food business has been loss making and regularly restructured.

Ultimately, IMHO this has reflected poor strategic management and a trading approach - especially in the Nigerian leadership team that remained 'Greek' in its thinking and key personnel.

The new central leadership team may well choose to focus elsewhere where the company has perhaps more opportunities in more attractive markets; however, it is known for its Nigeria operations which will make it hard for them to give up. I wish the business well but think comparisons to the true MNC is optimistic.

thirty fifty twenty

10th Jul '20

thanks Jack for good analysis and comparatives and highlighting the attraction of Premier Foods (LON:PFD) post the pension deal. I not that the company is very keen to highlight that the debt to ebitda is now comfortably below 3 - technically this is true but i think is a favourable intrepretation. even with the pension deal it is 2 years before the 40m a year obligation to the pension funds reduces to the mid scenario of 22m. EBITDA is a proxy for free CASH flow but in my analysis i deduct agreed pension payments to get a comparable debt to ebitda ratio. doing this the ratio for Premier Foods (LON:PFD) is currently 3.4 times and reducing to 3.2 times if we assume the 22m is more appropriate.

I am a holder and big fan of what the mgt has done at PFD and think now with the benefit of the covid sale surge will have a little extra CASH to invest in new machinery and more marketing / product innovation. however the other side of this is that debt reduction will (relatively) slow down compared to the past 2 years.

I agree that the sale of Hovis (or another brand) could provide another fillip to the price and i suggest also that, post pension deal, it is an ideal candidate for a PE take-over b/c it has steady sales and cash flow and the debt could be refinanced by a larger group.

the ship has defo turned and i although i think the current price is a little ahead of itself in the short term - over 24 mths timescale you allude to i think it will be much higher than today even after the big rise.

the only other company i know of with a material pension surplus is Marks And Spencer (LON:MKS) but i dont think the surplus there is large enough to be as transformation. other opinions very welcome though.

Premier Foods and PZ Cussons - two consumer defensive turnarounds

Premier Foods (LON:PFD)

Unlocking value at PFD step 1: debt reduction

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Jack Brumby

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