St Tropez sale looks easy for PZ Cussons but Nigeria exit is trickier

The long turnaround at PZ Cussons entered a new chapter last week, with the announcement it is to sell off its St Tropez tanning brand and launch a review of its sprawling African operations.

Spearheaded by CEO Jonathan Myers, a P&G veteran appointed in 2020, the Imperial Leather and Carex owner has been on the turnaround trail for years, but its course is proving stubbornly difficult to correct.

The group has already sold off a number of non-core assets – from property in Africa to its Nigerian dairy brand, Australian yoghurt and Polish soaps – but its shares are down 50% over the past 12 months.

One fundamental stumbling block has been the outsized part Nigeria plays in the business and how much Cussons has suffered from the political and economic instability there.

Inflation ended last year at 30% in the country, while its currency the naira has been devalued twice and lost 60% of its value against the dollar.

This has caused headaches for all major consumer companies operating there, with Unilever and GSK among those scaling back operations.

But Nigeria makes up almost 40% of PZ Cussons’ entire revenue and is its biggest single market, so the volatility has hit exceptionally hard.

Last week it announced a 23.7% drop in third quarter sales, pretty much directly as a result of the naira, while profits slumped 24% in the first half.

Myers says its interests in the region – which include joint ventures as well as products as diverse as refrigerators, dishwashing liquid and pharmaceuticals – are “too complex”.

“We’ve been operating in Africa for 140 years. It’s not a decision we take lightly to review strategic options, but equally there is no emotion as we look at this. We have to make the right call in pursuit of shareholder value.”

St Tropez ‘too complex’

If an exit from a chunk of its business in Africa is possible, the sale of its St Tropez tanning brand looks almost certain.

This is part of Cussons retooling its portfolio, Myers says. Tanning is seen as a non-core element of a portfolio “too complex for our size”. “In many ways we have the complexity of a large global business, without the corresponding infrastructure, resources or benefits that come from scale,” he notes.

AJ Bell’s Russ Mould notes: “Beauty brands need a lot investment, in market and product, to maintain their brand and pricing power.”

Notably, some 70% of St Tropez revenues stem from the US, meaning a buyer with the resources to drive growth in North America and globalise the brand is better suited.

Investec analyst Matthew Webb suggests it could be worth £100m, given the higher multiple seen in the sale of the Bondi Sands tanning brand to Japanese beauty conglomerate Kao Corporation last year.

“The sale of a single brand that could plausibly be worth £100m, when the market cap of the group is £400m, should prompt a reassessment of the investment case,” he argues.

PZ Cussons hopes exiting St Tropez and addressing complexity in Africa will enable it to put more focus on those parts of the business that are doing much better than its share price slump would suggest.

Its UK washing and bathing products, which include Original Source, have shown “strong” revenue growth, while Carex is back in growth and, importantly, recent strategic acquisition Childs Farm is up by double-digits.

Myers envisions a stronger focus on branded products for babies given the success of this deal, as well as hygiene and some beauty products, with the possibility of honing this focus through more acquisitions with capital unlocked by sales.

But the immediate focus will be on the huge debt pile of over £250m at the end of 2023. This is gradually coming down to £160m-£180m by the end of this year as it takes cash out of Nigeria, but cash generated by any sales would need to reduce this further.

Long-suffering shareholders backed the action plan last week, with shares up 6.8% on the news, to their highest level for three months.

With nothing seemingly off the table to address its woes in Nigeria, investors will hope a leaner group can finally shake off the years of underinvestment and declining sales.