PZ Cussons Six-Month Nigerian Train Rescue Exposes Emerging-Market Risks

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PZ Cussons Plc (PZC) Chief Executive Officer Alex Kanellis once spent six months tracking down and recovering a train load of soap lost in Nigerian bush country.

Delayed by rainy-season bridge washouts, the locomotive had run out of fuel, leaving the driver to live off yams from a nearby village and sleep in his cab while waiting to be found.

“He’d probably still be there if we hadn’t rescued him,” said Kanellis, who drove up and down 1,000 kilometers of colonial-era track trying to locate the stricken freight train.

PZ Cussons is benefitting from its foothold in Africa 15 years later as companies including Procter Gamble Co. (PG) turn to emerging markets for growth as consumer demand in Europe and the U.S. cools. The Manchester, England-based maker of Imperial Leather soap gets about 60 percent of sales from developing countries and has more than a century of experience moving goods in Nigeria, which Citigroup Inc. predicts will have the world’s fastest-growing economy over the next 40 years.

Investors are showing faith in PZ’ ability to exploit those ties. The shares have risen 24 percent in the past year, compared with gains of 9.6 percent for PG and less than 1 percent for Unilever. They trade at a multiple of about 23 times analysts’ estimates of earnings for the year ended May 31, more than Unilever at 14.5 times and PG at 17 times, Bloomberg data shows.

Sales probably rose about 5 percent in the year just ended, to 813.4 million pounds ($1.3 billion), according to five analysts surveyed by Bloomberg. That’s twice as much as the company generated 10 years ago. Profit may gain 3 percent to 65.7 million pounds.

Daily Challenges

“You have to deal with stuff on a daily basis in an emerging market that you take for granted elsewhere,” the 45- year-old CEO said in an interview at PZ’s headquarters.

In Africa, the company’s biggest region, sales declined last year because of a weakening in the dollar-naira exchange rate. Revenue was unchanged in the first half because of violence in the run-up to April’s elections and tighter lending conditions that hampered distributors of its products.

“With emerging-market potential comes risk,” said Nicola Mallard, an analyst at Investec Securities in London.

PG CEO Bob McDonald has emphasized growth in Brazil and other emerging markets since taking over in 2009, while Dove soap maker Unilever is also expanding in developing economies, where it now gets about 56 percent of sales. Guinness Nigeria Plc, a beermaking unit of Diageo Plc (DGE), is investing $336 million to expand brewing capacity in the west African nation, while competitor SABMiller Plc (SAB) plans a $100 million plant.

19th Century Startup

PZ Cussons has roots dating to 1879, when George Paterson and George Zochonis formed a trading post in Sierra Leone. A Nigerian office followed in 1899. PZ makes its own silicate for detergent and generates electricity for its factories.

That infrastructure and marketing expertise are reflected in the company’s stock multiple, according to Darren Shirley, an analyst with Shore Capital in London.

“They’re not just a seller of branded goods, they’ve got a unique distribution program, second only to the Nigerian military,” said Shirley, who rates the shares “hold.”

With no chain stores, Nigerian retailing “could be someone’s living room,” according to PZ Cussons’ Chief Financial Officer Brandon Leigh. “It could be an empty container someone puts a padlock on, and there’s a retailer.”

The informal nature of selling has helped the company in dealing with raw-materials inflation. Companywide, costs have been rising at an annual rate of as much as 8 percent, with PZ only able to pass on about three-quarters of that because of resistance from retailers and discounting in Europe, Leigh said.

Shrinking Bars

To cope, PZ cut soap-bar sizes to 100 grams from 125, and it’s considering reducing liquid-soap bottle sizes, he said.

In Nigeria, the company increased prices by 10 percent or more, Leigh said. There, PZ Cussons sells detergent in packages ranging from 4-gram sachets to 25-kilo bags for distributors who might sell it by the cup. So changing product sizes is much easier than in Europe — the company can reduce a 14-gram packet of washing powder to 12 grams, Leigh said.

The poorest Nigerians use cheap laundry soap for their hair, bodies, clothing and tabletops, Kanellis said. PZ sells laundry sticks than can cost less than 10 U.S. cents. As Nigerians progress out of poverty, they trade up to bathroom soaps such as PZ’s Premier brand, he said.

PZ sells beverages in Nigeria that don’t need refrigeration, some through a joint venture with Dublin-based Glanbia Plc. (GLB) Though its canned and powdered milk compete with drinks made by PepsiCo Inc. and Coca-Cola Co. (KO), the company’s long-life or UHT ice tea contends with “a bush-type product that will turn green after several months,” Leigh said.

Palm Oil

PZ is also looking to expand into palm oil, another field which has micro-competition. Most palm oil sold in Nigeria comes from small farmers who boil the fruit in old barrels and process it in pits in the ground, Kanellis said.

He expects the venture, a joint project with Singapore’s Wilmar International Ltd. (WIL) to build a palm-oil processing plant in Nigeria, to gross at least $300 million annually within three years after construction.

Nigerian transportation has improved each year since 1999, when civilian government took over, Kanellis said. Cross-country deliveries that sometimes took months on the rail network built when the country was a British colony now take four to five days using trucks equipped with satellite navigation devices and mobile phones, he said.

Kanellis still praises the dedication of the 1990s train driver who delivered 600 tons — 33 rail carloads — of Canoe, Duck and Imperial Leather soap in a six-month odyssey.

“No stealing, no pilfering whatsoever,” Kanellis said. “Not a bar was missing.”

To contact the reporter on this story: David Altaner in London at daltaner@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge in London at Ckeatinge@bloomberg.net

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