Time to sell PZ Cussons pending signs of a turnaround

SHARES in PZ Cussons tumbled as much as 13pc to their lowest level in more than six years, as the oil crisis hit the company's African markets.
However, Questor wouldn't go bargain shopping, as the group's balance sheet is now looking increasingly stretched after an acquisition binge Down Under.
Africa sales slump
1 The maker of Imperial Leather soap, Original Source shower gel and Morning Fresh washing powder has been hit hard after the plummeting oil price slashed consumer spending in Nigeria, its largest African market. However, Questor is more concerned by the movements taking place below the surface on the balance sheet.
The company has managed to arrest a sharp slowdown in its sales at the group level through a strategy of buying companies in Australia.
Questor believes this has greatly increased risks to investors and leaves a once stable defensive consumer goods company at the mercy of a sales slowdown.
Australian expansion
2 The company has spent almost £160m on acquisitions in the past five years. The greatest focus was Australia, with £26.3m spent on haircare brand Fudge, £43.4m on organic yoghurt maker five:am, and £42.2m for babyfood maker Rafferty's Garden.
The spending didn't stop pre-tax profits tumbling to £84m last year, down from £108.1m in 2011.
Meanwhile, net debt levels increased to £157.4m at the end of May last year, reversing the £52m in net cash on the balance sheet in 2011. The company said yesterday that net debt levels had increased again to £191m at the end of November. Putting that in perspective, net assets were £462m.
Higher debt levels are always a risk to the holders of equity when profits begin to fall.
PZ Cussons, which has huge exposure to emerging markets, has been in Africa for more than 100 years. The company generates 65pc of revenue and 41pc of operating profit from Africa and Asia, where profits fell 13pc and 5pc respectively during the six months to the end of November.
In particular, the significant weakening of the Australian dollar has hit its Asian markets. In Africa, Cussons has seen lower disposable incomes in Nigeria hit sales in the electricals division, while soaps, shower gels and edible oils sales suffered foreign exchange headwinds as Nigeria's currency, the naira, continued to depreciate against sterling.
Europe delivers
3 The European division, which 3 contributes about 60pc of group operating profits, performed well, with new product launches from Carex and St Tropez lifting operating profits by 4.7pc in the first half.
Brandon Leigh, chief financial officer, said: "We never overpay for brands." That said, Questor is worried by the rapid growth in the value attributed to acquisitions since 2011. It is the largest part of the balance sheet, with goodwill having increased by a third to £356m at the end of November.
The stock may have fallen sharply but it still trades on 17 times forecast earnings, and that looks far too high given the shift in the risk profile to shareholders.
Based on the current elevated rating and the illiquid nature of the shares - the founding family still owns a 35pc stake - Questor thinks the most prudent option would be to exit the shares until the company can demonstrate a turnaround.
* First published by The Telegraph Group Limited, London