FTSE 250 firm PZ Cussons (LSE: PZC) has had an awful year. The share price has plummeted 42% in the past 12 months. Currently hovering just about the pound mark, at times in the past several months the firm has been trading as a penny share.
Yet the Imperial Leather maker has a lot going for it. It has made tens of millions of pounds of profit in four of the past five years (including last year).
Last year saw revenues grow to over £600m. The dividend yield is a juicy 6.3% for now (although it remains to be seen whether the annual dividend will be maintained at its current level).
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So is this beaten-down FTSE 250 share a possible bargain for my portfolio?
Difficulties trading in developing markets
I think the answer is yes. But there are some clear risks here that help to explain the share price collapse. In one word, the key risk is Nigeria.
But that is simply a specific example of a bigger risk hardwired into the company’s business model of operating in developing markets with unpredictable political situations.
That can actually be a great move for a company like PZ Cussons. Some such markets, including Nigeria, offer huge untapped opportunities with young populations and higher prospects of economic growth than developed economies.
But they can be very difficult to operate in. Even FTSE 100 giant Diageo announced plans to sell a majority stake in its Nigerian Guinness brewer recently. My shareholding in Airtel Africa has been hit by a devaluation of the Nigerian currency.
After falling around 70% in the year leading up to PZ Cussons’ interim results, the unstable currency was described in those results as “the most significant challenge we have faced by far”. During the period, revenue fell 18% year-on-year and pre-tax profit was down by almost a quarter.
Why I see value potential
Nigeria continues to face significant challenges – and so does this FTSE 250 firm that generated over a third of its revenue there last year.
But with its long history of working in developing markets including the west African nation, I think PZ Cussons is well-placed to meet this challenge.
At some point I expect the currency problems in Nigeria to lessen. Meanwhile, the soapmaker has been trying to conduct more business there in US dollars than the local currency as a way to mitigate the impact on its financial performance of an unstable exchange rate.
Clearly the coming months will remain difficult. But the share price fall looks overdone to me. PZ Cussons has a proven business model, a large global customer base, well-established premium brands and is a money-making enterprise.
Airtel Africa means I am already as exposed to the Nigerian currency problems as I want to be. So I shall not be investing in PZ Cussons. But I do think the FTSE 250 share, trading on a price-to-earnings ratio of 9, looks like a bargain.
