FDC bi-monthly economic and business update - October 22, 2015

Countercyclical Spending, the Remedy for
Stagflation
The Nigerian economy has witnessed three consecutive quarters
of slowing growth and rising inflation, a situation economists refer
to as stagflation. Second quarter growth slowed to 2.35% while
third quarter growth is estimated at 2%. On the other hand, infla-
tion has increased steadily eight out of the nine months this year
to 9.4% in September.
Global oil prices have fallen sharply by over 58% from 2014’s
peak of $116pb to $48pb in October 2015. On a marginal cost/
marginal revenue basis, margins are down 77%. According to the
CBN’s economic report for the second quarter, gross federally col-
lected revenue declined by 27.7%; attributing the decline to
shortfalls in oil and non-oil revenue. The external reserves level is
also down 12.9% ($4.45bn) to $30.04bn, year to date. The Nige-
rian stock market has not been insulated from the shocks. The
market has lost 13.36% YTD while corporate earnings have been
below par; a reflection of declining disposable income, market and
policy uncertainty.
On the political front, the long awaited ministerial list has been
released and the screening and confirmation of some Ministers
concluded. The first thing the Ministers will do after taking up
their portfolios is to approve long standing contracts. While this
bodes the question- what is the source of funding for this project-
this might actually be the remedy the economy needs for the
state of stagflation it is in.
According to a well renowned economist, John Maynard Keynes,
A Financial Derivatives Company Publication
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FINANCIAL DERIVATIVES COMPANY LIMITED
Bi-monthly Economic
& Business Update
Volume 5, Issue 60
October 22, 2015
INSIDE THIS ISSUE:
Countercyclical Spending, the
Remedy for Stagflation
1
The Unintended Conse-
quences of the 1Kobo Stock
Rule
3
Global Perspective: Culled
from the Economist
Africa’s middle class
9
Global Perspective: Culled
from the FT
ECB raises possibility of further
stimulus at December meeting
14
Macroeconomic Indicators 16
Stock Market 19
Corporate Focus - PZ Cusson
Nigeria Plc
21

you spend your way out of an austerity. For Nigeria, this may
mean countercyclical spending; government spending on capital
projects and key sectors of growth such as construction, manufac-
turing, agriculture that will yield productivity gains, boost con-
sumer disposable income and ultimately stimulate economic
growth. In addition advocating for a lower interest rate will en-
courage banks to lend more. So back to the question of funding.
Likely sources of funding for the government include borrowing
from the local and international markets, aggressive tax collec-
tion, review of tariffs, etc.
The risk of this is a higher inflation rate. But there is no gain with-
out pain. If the level of economic growth achieved by the counter-
cyclical accommodative policy is significant, the impact of a high
rate of inflation may be muted.
Page 2

The Unintended Consequences of the
1Kobo Stock Rule
The Nigerian Stock Exchange was set to change in August with
the introduction of the 1 kobo stock rule. By removing the 50
kobo price floor, the new rule was supposed to boost liquidity and
investor confidence, as well as bring the Nigerian Stock Exchange
(NSE) more in line with advanced trading markets, which have no
price restrictions. However, on July 21, 2015 the implementation
of the new rule was suspended indefinitely citing fears that it
would further impair an already declining market capitalization.
The cold feet are understandable. The NSE All Shares Index (ASI)
has recorded an 11.31% loss since January amidst political uncer-
tainty, declining oil prices, and delays in policy formulation follow-
ing the election of the new administration. The new rule would
likely cause a further decline resulting in severe consequences for
the broader economy. Companies would likely see their market
values plummet, with declines as high as 50% being a very real
possibility. If market capitalizations fell below the minimum re-
quirement, affected companies would have to seek other means
of raising funds to meet their capital requirements.
Despite the anticipated negative consequences, however, the pol-
icy is an overdue market reform. It would contribute to market
liquidity and also reflect the true value of some dormant stocks
trading at nominal value on the exchange thereby promoting mar-
ket efficiency. This will go a long way in bringing the market to
par with other advanced markets making it more attractive to for-
eign portfolio investors and eventually increasing market size and
liquidity. These benefits outweigh the temporary pain of a reduc-
tion in stock prices and market value, as a strong market is foun-
dational for a strong and growing economy.
However, It is the timing and mode of implementation that will
determine if it will be successful or otherwise. The NSE must work
with the Securities and Exchange Commission SEC to synchronize
the implementation of the policy with a strong market rally. While
some level of pain is inevitable, effective collaboration on imple-
mentation would cushion the negative impact on investors and
the entire market, while achieving the benefits outlined above.
Page 3

Understanding the 50 kobo floor price
The current 50 kobo price floor was introduced following the 2008
market crash. The change was made to minimize the magnitude
of losses and salvage crashing stocks that were headed for 1
kobo. In effect the price floor of 50 kobo reduced the loss expo-
sure of individual investors and the entire stock market.
Following the crash, risk management frameworks for commercial
banks were improved, decreasing the exposure of the financial
system to the banks. As a result, the factors that led to the col-
lapse of the market have been addressed. Yet the 50 kobo price
floor has remained, acting as a support for stocks which otherwise
would have dropped further. It is in this context that the 1 kobo
rule was conceived.
Likely implications of the 1 kobo rule
There is no denying that the negative impacts of the 1 kobo rule
would be far reaching. It would likely impact entire sectors, merg-
ers and acquisitions, bank loans, penny stocks, and IPOs.
Sectors that have seen little movement from the 50 kobo mark
would be the hardest hit. One example would be the insurance
sector. Twenty-two of its stocks have remained at the 50 kobo
floor price since 2008 and the industry has all but lost national
investor confidence as a result. In other sectors, such as industri-
als and ICT the inability for companies to increase their stock
from 50 kobo could result in hostile takeovers and the rise of the
cartel behavior.
On the loans front, there could be a significant increase in margin
calls by commercial banks. Asset quality deterioration by compa-
nies whose stocks have been pledged as collateral would lead to
lenders calling for extra collateral to reduce or avoid credit expo-
sure. If the companies are unable to provide extra collateral, then
we might see an increase in the impairments and non-performing
loans, which will ultimately affect the banks’ profitability.
For individual and portfolio investors who trade primarily in penny
stocks, the danger of portfolio value erosion is even more pro-
nounced. Whilst the 1 kobo rule will give them the opportunity of
Page 4

exiting positions in illiquid stocks, it also exposes them to major
losses as they reassess their value after the selloff.
Companies preparing to embark on initial public offerings (IPOs)
may have to list at a lower price per share. This means they will
have to increase their outstanding shares to meet up with the
capital that they seek to raise. This also means that registrars will
have a lot more shares to reconcile and reconciliation will proba-
bly become more cumbersome.
Concerns about companies being delisted from the exchange have
also been raised from different quarters. When a stock price falls
to 1 kobo with little or no trading activity on the stock, there is a
probability of it being delisted from the exchange. The SEC has
constantly reiterated its commitment to support companies enlist-
ing on the exchange and exploiting the inherent opportunities that
the bourse has to offer. The move to implement the 1 kobo rule
may contradict this effort.
The Way Forward
Without a doubt, the impacts of the 1 kobo rule are severe and
varied. However, the importance of the 1 kobo rule cannot be
downplayed. When implemented, it would bring about the much-
needed liquidity in the stock market. Investors who have invest-
ments trapped in non-performing stocks would be able to sell
them off when the stocks find their true value. This would come at
some cost but would be much more preferable to having assets
that cannot be traded because they are overpriced. Market turn-
over will also increase, as more investors will be willing to trade
knowing that price floors won’t serve as barriers when they desire
to exit the market.
In the short term, the fall in stock prices will bring about in-
creased market activities, as more Nigerians and foreign portfolio
investors will be willing and able to trade on the exchange as
stock prices fall, bringing liquidity, increased trade volumes and
eventually market capitalization. Listed companies will be able to
raise more capital from the exchange stimulating economic activi-
ties.
Page 5

Long-term benefits will include improved market efficiency: in-
creased responsiveness of stock prices to market news and com-
panies periodic results. Companies listed on the exchange will
make every attempt to improve financial performance knowing
fully well that poor results will reflect on their stock prices and
make them susceptible to hostile takeovers and acquisitions.
Furthermore, when the rule is implemented, stocks currently trad-
ing at 50 Kobo will find their true value; more investors will be
able to increase their holdings in firms where the ownership struc-
ture is uneven. This is turn will increase their influence and voting
rights and may bring about increased responsibility by the board
of directors.
Investor confidence will be bolstered on improved market trans-
parency, as will the perception of international market players to
the market. Increased demand for cheap stocks will improve mar-
ket turnover and stock prices will be set by market forces as
against artificial support.
The benefits of the 1 kobo rule cannot be overstated. Overall, ad-
vantages of this rule to the economy, the exchange, listed compa-
nies and investors will outweigh its disadvantages despite initial
pains.
The timing of the implementation however is just as important as
the rule itself. For a while now, the market performance has been
unimpressive which is why the implementation of the rule was
suspended, It is best that the price floors are gradually reduced
from 50 kobo to, say, 30 kobo and that market performance is
carefully watched before the price floor is further reduced or to-
tally removed. A gradual reduction will help to gauge the market
response and allow time to formulate appropriate response meas-
ures to the precise challenges that arise.
Conclusion
Whilst the SEC may have good intentions with the formulation of
this policy, it is in the best interest of the NSE that this policy has
now been suspended. Proper research needs to be carried out and
Page 7

all factors taken into consideration before recommendations are
made as to how the above listed issues can be addressed and the
rule implemented. The net negative effects of this policy could
very well outweigh its positive effects if implemented at the wrong
time and using the wrong approach.
The rule, which has been temporarily suspended due to the de-
pressed nature of the exchange, will become effective at some
time in the future. However, there is no perfect time. Whenever
the NSE does implement the rule, the market will react and the
consequences enumerated above will play out. Whilst not a popu-
list reform, it is one that will bring about the much needed trans-
parency on the exchange and force companies whose stocks are
currently trading at 50k to do more work so that they do not lose
out of the market.
Page 8

Global Perspective: Culled from the Economist
Africa’s middle class
Few and far between
Africans are mainly rich or poor, but not middle class. That
should worry democrats
LOOK out from the cafés of Accra’s financial district and you could
be almost anywhere. In the shadow of glassy skyscrapers, Ameri-
can-accented entrepreneurs order lattes and ponder spread-
sheets. “You couldn’t have imagined this even five years ago,”
Joseph Baffour, a local financier, says of his surroundings.
“There’s been an astronomical change.”
On a continent once synonymous with war, famine and poverty, a
middle class has started to emerge, propelled by growth and ur-
banisation. Its rise has much to do with the spread of democracy
and greater rule of law—countries with such attributes tend to
generate more economic opportunities than those in which a few
rulers line their pockets. In turn, the new middle classes have
raised their voices in demanding clean and accountable govern-
ment and public services. A study by Nic Cheeseman of Oxford
University, found that in Kenya the richer people were the more
likely they were to support democracy (and vote for the opposi-
tion).
Yet step beyond the air-conditioned malls that are popping up like
meerkats across the continent, and it is clear how thin this
emerging middle class is. Just a few miles down the road from
Accra’s coffee-connoisseurs are the columns of smoke that billow
above Agbogbloshie, a digital dumping ground. Here hundreds of
men risk their health burning old electronics for useful parts.
Leave the capital altogether and the celebrated middle class
grows harder still to spot: high-rises give way to huts, suits to
shoelessness.
So too with much of Africa. Good data on the exact size of the
middle class are hard to come by, but it remains small across
most parts of the continent. The Pew Research Centre, an Ameri-
can outfit, reckons that just 6% of Africans qualify as middle
Page 9

class, which it defines as those earning $10-$20 a day. On this
measure the number of middle-income earners in Africa barely
changed in the decade to 2011.
More recent data from EIU Canback, a consultancy (and sister-
company of The Economist), show some growth (see chart) in the
decade to 2014 but it is painfully slow: 90% of Africans still fall
below the threshold of $10 a day and the proportion in the $10-
$20 middle class (excluding very atypical South Africa), rose from
4.4% to only 6.2% between 2004 and 2014; over the same dec-
ade, the proportion defined as “upper middle” ($20 -$50 a day)
went from another 1.4% to 2.3%. Other surveys are also disap-
pointing. Standard Bank, a South African lender, thinks that
though the number has increased, there are still only 15m middle
class households in 11 of sub-Saharan Africa’s bigger economies
(excluding South Africa and using a range of $15-$115 a day).
Page 10

The puzzling question posed by these data is why the middle class
is so small after a decade in which economic growth has averaged
more than 5% a year, about twice as fast as population growth.
One reason is that the proceeds of economic growth are shared
very unequally. In recent years inequality has increased alongside
growth in most parts of Africa.
Another reason is that poverty in many parts of Africa is so deep
that even though incomes may have doubled for millions of peo-
ple, they are now merely poor rather than extremely poor. Laur-
ence Chandy at the Brookings Institution, an American think tank,
points out that the average person in extreme poverty in Africa
lived on just 74 cents a day in 2011, compared with 98 cents in
other parts of the developing world. Ethiopia, which is both one of
Africa’s most populous nations and best developmental perform-
ers, is a good example. Its share of people living on more than
$10 a day has increased more than 10 times in the decade to
2014 to 2% of the population: but that still left close to 98% of
Ethiopians living below this threshold.
A low wage is better than none at all, but those living on $10-$20
a day are hardly sipping sangrias at sunset. For most of them, life
is still tough. “I came from the north because I needed a job,” a
sweating Awal Ibrahim says as he cuts the copper out of old com-
puter wires in Agbogbloshie. Working relentlessly in the baking
heat, he earns about 20 cedis ($5) a day. Does he still feel poor?
He glances with commendable humour at the smouldering Sodom
surrounding him: “If I could find other work I would.”
That is the problem. Unlike Asia, Africa has failed to develop in-
dustries that generate lots of employment and pay good wages.
Only a few countries manufacture very much, largely because na-
tional markets are small and barriers to trading within Africa are
huge. Most people who leave the countryside move into labour-
intensive but not very productive jobs such as trading in markets.
John Page, also of Brookings, reckons that such jobs are on aver-
age only about twice as productive as the ones that many left be-
hind.
For investors who piled in on the promise of a new African bour-
geoisie, this is a worry. The commodities boom has ended and all
but the richest tend to stop spending at the first sign of economic
trouble, as they have done in Nigeria and South Africa, the conti-
Page 12

nent’s two largest economies. Having overestimated the number
of upwardly mobile people, many big firms are expanding far
more slowly than they expected. A few years ago, Shoprite Hold-
ings, South Africa’s largest retailer, envisaged opening 600 -800
stores in Nigeria. It currently has 12. Across the continent in
Kenya, Cadbury and Coca-Cola have closed factories. “We thought
this would be the next Asia”, Nestlé’s chief executive for equato-
rial Africa said earlier this year. “But we have realised the middle
class…is extremely small and it is not really growing.”
Those investors with deep enough pockets can afford to wait. In
the meantime, they are expertly targeting poorer shoppers with
such things as tiny packets of washing powder and water. In Ni-
geria UAC Foods sells cheap sausage rolls through bus windows
rather than in supermarket aisles.
But those concerned about raising economic growth and the
spread of democracy in Africa should be less patient. The middle
class that has emerged, small as it may be, is also vulnerable;
even mild economic shocks may be enough to push households
back below the threshold of poverty. That in turn may slow the
impetus for reform, and perhaps even reverse it.
Page 13

Global Perspective: Culled from the FT
ECB raises possibility of further stimulus at De-
cember meeting
The European Central Bank stands “ready to act when needed” if
the euro zone’s economic recovery disappoints, Mario Draghi has
vowed in comments that raise the spectre of an expansion to the
bank’s €1.1tn asset -purchase programme and a further cut in its
deposit rate.
The comments by the President of the ECB during a press confer-
ence came after the eurozone’s central bankers decided to keep
interest rates on hold at record lows after a meeting of the gov-
erning council in Malta on Thursday.
The euro declined by 1.23 per cent against the dollar to just under
$1.12 as Mr Draghi spoke, while two-year German government
borrowing costs sunk to a record low of -0.293%.
The ECB’s governing council held its benchmark interest rate at
0.05%. The deposit rate charged on bank reserves parked at the
ECB remains minus 0.2% — although Mr Draghi said lowering it
further into negative territory had been discussed. “The degree of
monetary policy accommodation will need to be re-examined at
our December monetary policy meeting,” said Mr Draghi.
December is also when ECB staff roll out their latest projections
for growth and inflation — raising pressure on what is likely to be
seen by market analysts a crunch meeting. Mr Draghi added that
“there were a few on the governing council” who pressed for ac-
tion today.
In September, Mr Draghi indicated that policymakers would roll
out a beefed up version of their quantitative easing package
should the slowdown in emerging markets and financial market
volatility threaten growth and inflation within the single currency
area. Most economists now expect inflation to take longer than
previously thought to return to the ECB’s target of below but close
to 2%. The ECB has been buying €60bn of mostly government
bonds since March. It intends to keep on doing so until September
2016. Many economists think the ECB will announce an extension
of the programme beyond the autumn when they meet in Decem-
ber.
Page 14

Officials at the central bank have also said they could buy more
assets each month or extend the list of assets eligible for QE — a
list that at the moment is limited to government bonds and cer-
tain packages of bank loans.
While the programme appears to have thawed the region’s credit
markets, growth remains lacklustre and inflation has fallen back
into negative territory.
Page 15

Macroeconomic Indicators
Money Market
Short term interbank rates averaged 6% p.a. from October 2 –
22, 2015, 841bps lower than the corresponding period in Septem-
ber. This was as a result of increased market liquidity as inflows
exceeded outflows during the period under review. The CBN de-
layed in mopping up excess liquidity, possibly as part of its drive
to encourage lending to the real sector and reflate the economy.
As at October 22nd
, the OBB and O/N rates were at 5.33% p.a.
and 5.92% p.a., 1,800bps and 2,091bps lower than their respec-
tive figures in the previous month.
Outlook
Money market liquidity is expected to remain at current levels
pending significant outflows. However, an expected disbursement
of FAAC funds estimated at N400bn may further boost liquidity.
Oil Market
Oil Prices
Global oil prices (Brent crude) averaged $49.77pb from October 2
– 21, 2015, 2.2% higher than the average of $48.68pb in the cor-
responding period in September. Although, concerns over Russia’s
involvement in Syria caused a temporary spike in Brent crude to
$50pb during the period under review, slowing Asian economies
and an increase in U.S. crude inventories continued to weigh on
crude prices. In addition, OPEC continued to produce above its
production quota of 30mbpd as they battle for market share with
Non-OPEC members.
Outlook
The outlook on oil prices remains bearish as crude prices are
unlikely to rebound with slowing demand from emerging econo-
Page 16
Source: FMDQ, FDC Research
Chart 1: Average NIBOR (% p.a.)

mies, increased OPEC production and U.S. inventory.
Forex Market
Exchange rate volatility continued in October, as market panic
heightened with the decline in external reserves towards the
$30bn psychological resistance level. As at October 22nd, the
naira traded at N226/$ at the parallel market, a 1.1% deprecia-
tion from N223.5/$ at the end of September. The naira however,
appreciated by 0.16% to N198.77/$ at the Interbank Foreign Ex-
change Market (IFEM) on October 22nd
compared to N199.08/$ at
the end of September. The IATA rate of exchange remained flat at
N200/$ during the same period under review.
Outlook
The CBN has reiterated that currency devaluation is unlikely but
the pressure on the naira is expected to continue with no signifi-
cant accretion in external reserves.
External Reserves
Nigeria’s external reserves fell by 0.99% ($300m) to $30.04bn as
at October 21st
. Year to date, the reserves level has declined by
12.9% ($4.45bn). The level of import and payments cover is
down to 4.86months from 4.92 months at the end of September.
Page 17
Source: FMDQ, FDC Research
Chart 2: Forex N/$
Source: CBN, FDC Research
Chart 3: External Reserves ($'bn)

Stock Market
The expected release of the ministerial list drove positive market
sentiments as investors expect a mini market rally to follow the
announcement of a cabinet. The market managed to sustain
gains recorded in the first two weeks of the month.
Sentiments were buoyed by the expected release of the ministe-
rial list, and positive reports by the military on containment of the
terrorist group in the North-East.
The NSE ASI gained 2.99% from 30,311.77 to 31,217.77 its high-
est in Seven weeks. Market capitalization also increased by 1.69%
from N10.42trn to N10.59trn. Consequently, the year-to-date
(YTD) return in the market was -9.92%.
All sectors recorded positive performance in the second half of the
month.
The consumer goods sector had the best performance: gaining
4.97% during the period despite rising inflation, Nigerian Brewer-
ies, NASCON and Nestle managed to drag the oil and gas sector
into positive territory with combined gains of 22% during the pe-
riod.
During the period, financial services sector dominated activities on
the exchange accounting for 55.99% of total value traded. Con-
sumer goods sector accounted for 19.40% whilst industrial goods,
conglomerates, oil and gas and accounted for: 10.13%, 7.33%,
5.25% respectively. Total volume of shares traded within the pe-
riod was 3.37bn, while market breadth increased to 1.07x as 44
stocks advanced against 41 stocks that declined. 108 stocks re-
mained unchanged during the period under review.
In line with our expectations, the MPC at its just concluded bi-
monthly meeting, decided to reduce the Cash Reserve Require-
ment (CRR) to 25.0% from 31.0% and maintain the going rate of
13% for the MPR
We expect that this decision would help to ease the liquidity
crunch in the system and have a net positive impact on banking
stocks in Q4.
Page 19
Source: NSE
Chart 4: Sectors in September 2015

Outlook
Positive sentiments may drive the Nigeria equities market in the
first two weeks of the month after the ministerial list is released
and investors play out likely policy scenarios. We expect renewed
interest in the exchange by local investors as market activities
pick up. Long-term investors will likely wait for Q3 results after
which they will take positions in undervalued stocks.
However, poor Q3 results may dampen investor confidence as the
effects of government policies may partially affect Q3 results. Ef-
fects of these policies will be felt the most in Q4 due to policy
lags. Some level of volatility is expected in the first two weeks of
the month, as speculators will attempt to take advantage of mar-
ket sentiments.
Page 20

Corporate Focus - PZ Cusson Nigeria Plc
Sector : Fast Moving Consumer Goods
Ticker Symbols:NSE Bloomberg: PZ:NL Reuters: PZ:LG
FT: PZ:LAG
Shares Outstanding: 4.2b TP Downside: 12.91%
Target Price: N22.97 Market Cap: N86.99b 2015
Annual Dividend: N0.61 2015 Annual Dividend Yield: 2.53
Price:N25.39
PZ CUSSON NIGERIA PLC: Old assumptions not necessary
for new economic normalcy
Analysts Recommendation: SELL
Recommendation Period: 9 months
Analysts Note: Current economic conditions likely to
constrain top-line and bottom-line growth
The manufacturing sector has been resilient despite facing turbu-
lence. The current economic conditions; naira devaluation, tight
monetary and fiscal policy/directives, lower oil prices, low external
reserves and security challenges in the North-East region have all
contributed to stifling the country’s business environment. PZ
Cussons Plc has not been isolated from the impact of these
trends. It reported first quarter revenue (Q1’15) of N14.95 billion
representing a 0.44% decline from the previous year. On a 5-year
trend, decreasing revenue has been observed which can be tied to
the economic conditions. Its cost of sales for Q1’15 stood at
N10.82bn representing 72.4% of Sales. This represents a mar-
ginal reduction in cost of sales when compared to Q1’14 ratio of
73.09% thus attesting to the company’s ongoing cost reduction
programme. As a result, the stock is overvalued and we are rec-
ommending to SELL.
Profile
PZ Cussons Nigeria dates back to December 4, 1948 under the
name PB Nicholas & Company Limited. It became Alagbon Indus-
Page 21

tries Limited in 1960 and in 1972 it was listed on the Nigerian
Stock Exchange (NSE). In 1976, it changed its name to Paterson
Zochonis Industries Limited and later adopted PZ Cussons Nigeria
Plc in 2007, which is its current name. Over the years, PZ Cus-
sons has evolved to become one of the leading brands in the
country by gaining deep insight into the Nigerian market, its con-
sumers and general landscape. The company has collaborated
with strategic companies such as Wilmar International and Glanbi-
ato successfully provide products that meet consumers’ needs. It
focuses on the manufacturing, distribution and sale of a number
of consumer products including: detergents, soaps, cosmetics,
medications, confectionery, refrigerators, freezers, air condition-
ers and home appliances. The company remains the market
leader in the toilet soap and baby soap segment.
Page 22
Business Segment Brands
Home Care Elephant, Zip, Jet, Tempo, Rex, Morning Fresh
Soaps
Medicaments
Hair Care
Baby Care
Skin Care
Perfumes
Household Appliances
Consumer Electronics
Electrical retail
Nutrition
Palm Oil
Premier, Imperial Leather, Joy, Duck, Canoe, Drum
Robb, Heatol, Super Robb, Medicated Dusting
Powder
Venus, Joy
Nigerian Baby Care, Cussons Baby Range
Venus, Stella Pomade, Joy, Carex
Dan Duala, Venus Gold, Joy Cologne
Haier Thermocool
Haier Thermocool
Cool World
Coast; Yo; Nunu; Bliss
Mamador; Kings Refined Palm Olein

At its core, PZ Cussons Plc is rivalled by Nestle, Cadbury, GlaxoS-
mithKline (GSK) and Unilever. However, its unique selling point is
its broad distribution network, which spans 25 channels across the
country. It's strategic investment in distribution centres ensure
that PZ Cussons can reduce cost and reach remote markets of Ni-
geria. The challenge with a wide network is that PZ Cussons's po-
tential for geographical expansion is limited. Increased pressure
on disposable income will continue to present PZ Cussons with
some challenges, its revenue will brace the impact.
Aware of these limitations, the company has embarked on a cost
reduction programme and has initiated a brand renovation pro-
gramme in its value add portfolio such as Premier soap. In addi-
tion, it is increasing capacity utilization of its palm oil joint venture
with Wilmar Nigeria Limited.
Page 23
PZ CUSSON
NIG. PLC 2011 2012 2013 2014 2015 CAGR
N'000 N'000 N'000 N'000 N'000 %
Non-Current Assets 25,034,942 24,360,347 24,370,445 24,485,136 25,217,847 0.15%
Current Assets 43,891,587 40,046,450 47,925,975 46,480,599 42,170,067
-
0.80%
Total Non-Current Liabilities 3,670,536 4,426,382 4,462,476 4,475,105 4,152,489 2.50%
Total Current Liabilities 22,087,259 17,112,373 21,397,087 23,952,048 19,562,981
-
2.40%
Net Assets 43,168,734 42,868,042 46,436,857 42,538,582 43,672,444 0.23%
CAPITAL AND RESERVES
Share Capital 1,588,191 1,985,238 1,985,238 1,985,238 1,985,238 4.56%
Share Premium 6,878,269 6,878,269 6,878,269 6,878,269 6,878,269 0.00%
Other Reserves 32,726,881 32,065,610 35,252,554 31,711,254 32,573,287
-
0.09%
Non-Controlling Interest 1,975,393 1,938,925 2,320,796 1,963,821 2,235,650 2.51%
Total Equity 43,168,734 42,868,042 46,436,857 42,538,582 43,672,444 0.23%
COMPREHENSIVE INCOME
Revenue 65,877,984 72,154,601 71,343,088 72,905,679 73,126,070 2.11%
Profit Before Tax 8,025,266 4,306,863 7,650,265 6,949,985 6,556,814
-
3.96%
Taxation 2,328,200 1,768,017 2,329,078 1,867,238 1,986,027
-
3.13%
Profit After Tax 5,697,066 2,538,846 5,321,187 5,082,747 4,570,787
-
4.31%

Management
At the helm of PZ Cussons Plc is Chief Executive Officer Mr. Chris-
tos Giannopoulos who joined the group in July 1988 and the Nige-
rian subsidiary in 2002. He has been the CEO since 2009 and pre-
viously served in several managerial roles including Managing Di-
rector of Soap & Detergent, Managing Director of PZ Cussons
Kenya Plc, Managing Director of Supply Chain, and Chief Operat-
ing Officer of PZ Cussons Nigeria Plc. The company’s executive
management team comprises of respected and experienced mem-
bers who have worked in PZ Cussons for a considerable time in
various capacities. They include: Mr. David Petzer, Chief Financial
Officer; Ms Joyce Folake-Coke, Human Resource Executive Direc-
tor; and Mrs. Yomi Ifaturotin, Corporate Affairs Director among
others.
What the Bulls and Bears Say
The Bulls Say:
 PZ Cussons Plc's extensive distribution network cuts across
the country and would prove costly and difficult for a new
entrant to replicate.
 The company’s revenues are relatively diversified and thus
resilient in the present economic downturn.
 Effective marketing and an adaptive product portfolio has
served as an economic moat in periods of shifting consumer
tastes and increased pressure on disposable income.
 The buy-out stake of Glanbia Limited presents an opportu-
nity for further investment thus ensures control of its sup-
ply chain.
 With the company’s access to cheap funds from its parent
company, its finance war-chest can be called to bear to re-
duce its cost of funding.
 The company’s loans are primarily in US dollar but its ex-
posure is limited (approximately 5% debt to equity)
Page 25

The Bears Say:
 Despite the company’s product popularity; the drive for in-
creased market share from competitors will intensify from
rival companies such as Unilever, Cadbury and Nestle
 Its product price increase may weigh on demand of its prod-
ucts thus affecting revenue growth
 Exchange rate depreciation and the inflation rate upswing
will pressure the pricing of most PZ Cussons’s products
 The current economic climate and outlook, generally weighs
on the sector and market.
– Dampens the purchasing power of many Nigerians
– Insecurity in the northern region of the country
Investment Thesis
FDC’s SELL recommendation on PZ Cussons Plc stock for a period of
nine months is based on a discounted cash flow valuation, earnings
growth and prevailing macroeconomic conditions. Over the past five
years, the company’s earnings growth has shown a downward trend
and thus is likely to translate to a lower share price in the near fu-
ture. The company’s stock is currently over -valued by 12.96%
based on its October 2, 2015 trading share price.
First quarter results for 2015 saw revenue decline by 0.44% versus
a 0.31% decline in the prior year. For the rest of the year, revenue
is expected to grow by 1.5% as against 0.3% recorded. The com-
pany’s profit after tax (PAT) fell by 33.33% from N641.69million
recorded in Q1’14. In addition, distribution, administrative and
other expenses as a percentage of sales increased from 21.59% in
Q1’14 to 23.3% in Q1’15. Factors such as the naira devaluation,
lower consumer disposable income, and higher inflationary pres-
sures are to blame for the weak earnings and net income, despite
PZ Cussons’s limited exposure to the naira. On the brighter side,
the company has maintained a consistent paying policy for over 10
years. We feel this will continue, but we expect a downward review
in dividend payout.
Page 26

Overall, we believe efficiency gains from current innovation, the
growing demand for both consumer products and white goods are a
plus. However, the unfavorable macroeconomic conditions will be
its encumbrance in growing its revenues. Consequently, the com-
pany is overvalued.
PZ Cussons Plc Valuation using DCF/FCFE:
Our intrinsic value for PZ Cussons Plc was arrived at by using a Dis-
counted Cash Flow (DCF) valuation method. Key assumptions in-
clude:
 The DCF valuation method is based on a four (4) year fore-
casted financial statement.
 We assumed a terminal growth rate of 4.5% in estimating
the company’s future cash flows’.
 The target price of PZ Cussons Plc is N22.11, which is a
12.96% discount to the current price of N25.39 as at Octo-
ber 2, 2015.
 A cost of equity of 10%. Beta of 0.6234
 Capital expenditure over the foreseeable future of four years
is projected to grow at 0.4%.
 Over the past five years, PZ Cussons Plc's cost of sales, dis-
tribution administrative and marketing expenses have aver-
aged 73.8% and 17.1% respectively.
Page 27

4 Year Free CashFlow to Equity Projections
PZ CUSSON NIG. PLC
2016 2017 2018 2019
N'000 N'000 N'000 N'000
Turnover/Revenue 74,222,961 75,633,197 77,297,128 79,074,962
EBITDA 19,158,695 19,522,710 19,952,210 20,411,111
EBIT 6,763,460 6,891,966 7,043,589 7,205,592
Less: Cash Taxes @ 32% (2,132,691) (2,173,213) (2,221,023) (2,272,107)
Tax-effected EBIT (NOPAT) 4,630,769 4,718,754 4,822,566 4,933,485
Plus: Depreciation & Amortization 12,395,234 12,630,744 12,908,620 13,205,519
Capital Expenditures (610,694) (490,742) (579,024) (618,661)
Change in Net Working Capital (1,700,706) (461,848) (544,932) (582,235)
Unlevered Free CashFlow 14,714,604 16,396,907 16,607,230 16,938,107
WACC @ 10% 10%
NPV of Unlevered Free Cash Flow 50,882,990
Perpetuity Growth Rate
Undiscounted Discounted EBITDA Multiple
Perpetuity Growth Rate 4.5% 92,376,005 62,908,587 4.53
Discounted Cash Flow 113,791,577
Equity Value 93,321,218
Implied Price Per Share 22.11
Risk
The country’s prevailing macroeconomic conditions and negative
sentiment; the expulsion of Nigeria from the JP Morgan index; the
slowdown in foreign portfolio investments; and the Central bank
of Nigeria (CBN) ban on foreign currency deposits and forty-one
(41) items forex ban all have the potential to impact PZ Cussons
Plc in the form of market risks, security risks and economic uncer-
tainty.
Page 28

Important Notice
This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into
any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such
future movements will not exceed those shown in any illustration. All rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with
respect to any matter contained herein.
PZ Cussons’s financials could be affected by commodity price fluc-
tuations, particularly for raw material such as Crude Palm Oil (CPO),
tallow, sodium lauryl esther sulfate (SLES), and linear alkylbenzene
(LAB). The company is also, exposed to currency risks on foreign
denominated borrowings from PZ Cussons' Treasury Centre-Middle
East & Africa Limited. Exposure though insignificant, could reduce
profit accruable to equity holders in terms of high finance costs.
Nevertheless, given the macroeconomic conditions, interest rate
hikes are unlikely due to an already tightened monetary policy.
Finally, the security issues have persisted for quite a while in the
North-East region, disrupting major economic activities, restricting
geographical distribution and the sale of PZ Cussons’s products. The
presence of an experienced and quality management team have
consistently managed the macroeconomic challenges and will con-
tinue to be called upon to affect innovation, exploit success, and
ensure continuous productivity improvement and organized aban-
donment in order to navigate this turbulent period.
Page 29

FDC bi-monthly economic and business update - October 22, 2015

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