Share Sleuth: if this firm is to prosper, it must adapt

Richard Beddard is betting that a company with big-brand ballast can revive its flagging fortunes.

In October last year, I noted that PZ Cussons was at a crunch point. The company owns illustrious consumer brands such as Imperial Leather soap, but revenue and profit had declined significantly over the previous five years. PZ Cussons had halted its acquisitive strategy and started selling its less profitable businesses, some of them acquired only recently.

Investors had lost faith and the shares traded on a multiple of 12 times adjusted profit. Since then the share price has declined a bit further and subsequently recovered. As I write, on the second trading day of the year, PZ Cussons shares cost 206p, valuing the enterprise at the same 12 times multiple as in October.

Firm in flux

One thing has changed in the interim. The company announced in December that Alex Kanellis, the man ultimately responsible for the firm’s failed acquisitive strategy, as well as nearly a decade of earlier growth, will leave PZ Cussons on 31 January. He will follow the firm’s longstanding finance chief, who left in June 2019. The board is searching for a new chief executive, but it is reassuring shareholders that it is committed to the new focused strategy Kanellis initiated and the people-focused culture he championed.

I think this strategy is sound. Thanks to cost-cutting, PZ Cussons still earns a healthy return on capital and has respectable cash flows, but it needs to invest if it is to grow again. Investing in acquisitions lifted the firm’s debt but did not deliver growth; and since most of the free cash PZ Cussons generates funds its dividend, it does not have money to invest without cutting its dividend or borrowing. Selling off poorly performing brands to finance improvements in better-performing brands is an admission of failure, but it may also be a catalyst for growth without sacrificing the dividend. That is the aim of the firm’s new ‘focus, scale and accelerate’ strategy.

This is a time of change, and there- fore uncertainty, at PZ Cussons, which explains why its shares are so unpopular. That uncertainty may or may not be giving us an opportunity to buy at an attractive valuation, which is, of course, the standard dilemma facing any contrarian investor. I have rarely felt the ten- sion between the doubtful prospects of a business and the tug of a low valuation so acutely, – which is why, in October and November 2019, when it came to making the one trade I allow myself each month, I found other, less uncomfortable trades to make.

My doubts revolve around brands that have for decades been reliable earners for investors. Brand owners are under pressure from two sources: discount retailers who essentially ripoff their products and the proliferation of novel alternatives to big brands on the internet. PZ Cussons’ brands are an indication of its past success, but may not underwrite its future.

If the company is to prosper, it must adapt. It is already doing so, but its capacity to adapt will depend on the people who work for it.

Even though two of those people, hitherto the most significant, have no future at the company, I think PZ Cussons’ emphasis on its culture is more than just marketing blather in annual reports and on the company’s website. Judging by the reviews on recruitment websites, it is a good place to work. A new chief executive could build on its culture and improve high-profile brands such as Imperial Leather, Original Source and St Tropez, a fake tan product.

I have added 1,870 shares to the portfolio at a price of 205p (the broker’s price). The total cost was £3,878, including charges of £10 in broker fees and £19 in stamp duty. I put just 2.5% of the portfolio at risk, my minimum trade size, which reflects my remain- ing uncertainty about the firm and gives me scope to add more shares should I develop more backbone.

Performance on the rise once more

Share Sleuth performance graph Feb 2020

 

Cussons brings big-brand ballast

Portfolio     Cost (£) Value (£) Return (%)
Cash       5,608  
Shares       149,048  
Since 9 September 2009     30,000 154,656 416
           
Companies   Shares Cost (£) Value (£) Return (%)
ALU Alumasc 938 999 929 -7
ANP Anpario 937 3,168 3,186 1
AVON Avon Rubber 192 2,510 3,994 59
BMY Bloomsbury 1,256 3,274 3,755 15
CGS Castings 1,109 3,110 4,702 51
CHH Churchill China 341 3,751 6,206 65
CHRT Cohort 1,600 3,747 11,552 208
DTG Dart 456 250 7,857 3,043
DWHT Dewhurst 735 2,244 7,350 228
GAW Games Workshop 198 568 12,009 2,015
GDWN Goodwin 266 6,646 8,219 24
HWDN Howden Joinery 748 3,228 5,012 55
JDG Judges Scientific 159 3,825 8,936 134
NXT Next 45 2,199 3,131 42
PMP Portmeirion 349 3,212 2,862 -11
PZC PZ Cussons* 1,870 3,878 3,880 0
QTX Quartix 1,085 2,798 3,949 41
RM. RM 1,275 3,038 3,545 17
RSW Renishaw 92 1,739 3,597 107
SOLI Solid State 1,546 4,523 10,358 129
TET Treatt 1,222 1,734 5,682 228
TFW Thorpe (F W) 2,000 2,207 7,140 224
TRI Trifast 2,261 3,357 4,092 22
TSTL Tristel 750 268 2,888 976
VCT Victrex 150 2,253 3,810 69
XPP XP Power 339 6,287 10,407 66

Notes: *New addition. Transaction costs include £10 broker fee and 0.5% stamp duty where appropriate. Cash earns no interest. Dividends and sale proceeds are credited to the cash balance. £30,000 invested on 9 September 2009 would be worth £154,656 today. £30,000 invested in FTSE All-Share index tracker accumulation units would be worth £69,749 today. Objective: To beat the index tracker handsomely over five-year periods. Source: SharePad, as at 3 January 2019

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