The Value of Brands

And PZ Cussons PLC

 

Image courtesy Walmart website

 

Proctor & Gamble (P&G) once commercialised two big American brands of toilet paper. Charmin was the market leader and White Cloud ranked seventh. In 1992, P&G stopped selling White Cloud to concentrate its marketing efforts on Charmin. Its ownership of the White Cloud brand was allowed to lapse and White Cloud was reregistered by a company called Paper Partners.

Paper Partners (renamed White Cloud Marketing) gave the exclusive US license of White Cloud to Wal-Mart Stores Inc., in exchange for a royalty. Simultaneously, it gave exclusive manufacturing rights to Scott Paper of Canada (now Kruger Products).  Walmart marketed White Cloud as its premium own-label brand and sales reached $600 million in 2008. In 2012, White Cloud was voted the best toilet paper in a US Consumer Report survey. Today the brand's sales, which include tissues, wipes and nappies, top $1 billion. Charmin continues to be the best-selling toilet paper in America, but the fact that Walmart was willing to pay a royalty to use the White Cloud brand illustrates the value of its name.

Himmel Brands of Florida has been revitalising discarded brands for fifty years. To a UK consumer, their best-known revival is Ovaltine. Himmel identifies brands that:

Ø  Have a rich heritage

Ø  Have withstood the test of time

Ø  Have been neglected

A brand is a slippery thing to value. Traditional accounting methods used by marketeers end up by giving the greatest value to the biggest companies - today Apple tops the table for brand value in the USA. Consumers are notoriously fickle. It might surprise many readers to learn that, according to a 2014 survey of consumers undertaken by the Centre for Brand Analysis and a panel of experts, British Airways and Rolex take the two top spots for the best brands in the UK. Consumers rate Apple at 14th, behind the BBC (4th), Heinz (5th) and Andrex (12th). Kimberley-Clark, the American owner of Andrex, must be chuffed to find their brand of toilet paper two places ahead of Apple, four places ahead of Nike and eight places ahead of Mercedes Benz in the heart of the British consumer. Could this be thanks to the adorable Golden Labrador puppy they use in their ads?

Other brands seem to have high value but make little money for their owners. Brand Finance awarded Ferrari the world's most powerful brand in 2014. It scored highest for "desirability, loyalty and consumer sentiment to visual identity, online presence and employee satisfaction". Yet Ferrari's earnings before interest, tax and depreciation were a modest $385 million in 2013 (it is part of Fiat Chrysler). In terms of value, it ranks 350th of all brands in the same report. Ferrari has not discovered how to monetise its great brand.

The charm of brands is their long-term income-generating power, which is a powerful draw for the investor. Yet only those brands that have been bought from a third party have any recognised value in a company's accounts. Brands that have been created by a company have no asset value at all. Which is why company valuations based on net assets have little relevance for the investor in brand heavy companies.

Investors would be wise to give special value to brands: 

·         Which are stand-alone. BMW is a top brand but it is useless without the technical and manufacturing skills and facilities required to design and make its cars. On the other hand, if Colgate-Palmolive sold its brand of toothpaste to another concern, the new company could, without too much difficulty, continue to realise its value.

·         That are first in their market sectors. They are worth far more than those that rank second, which in turn are worth far more than that rank third, and so on.

·         Which transcend national boundaries. This is the strength behind Coca-Cola's brand.

·         That are found in market clusters within the same company. Cadbury was valued by Kraft for the multiple brands under the Cadbury label (Dairy Milk, Fruit & Nut, Bourneville, Wispa etc.).

Although many companies can claim to own brands, few brand-heavy companies are listed on the London Stock Exchange. Some that have been reviewed in this blog are:

Reckitt Benckiser - see http://thejoyfulinvestor.blogspot.co.uk/2013/05/riskand-asset-allocation-dilemma.html

A G Barr - see http://thejoyfulinvestor.blogspot.co.uk/2013/09/theins-and-outs-of-company-valuation.html

Unilever - see http://thejoyfulinvestor.blogspot.co.uk/2014/01/where-are-we-now-in-stock-market-cycle.html

Nichols - see http://thejoyfulinvestor.blogspot.co.uk/2014/04/aimshares-and-nichols-plc-introduction.html

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PZ Cussons PLC

 

Image courtesy PZ Cussons website

 

PZ Cussons (PZC) traces its origins to Africa, where it was founded in 1879 as a trading post in Sierra Leone. Today the company specialises in personal care products, which are mainly sold in a small number of countries. With a market capitalisation of 1.5 billion pounds, it is far smaller than its main multinational competitors. These include Proctor and Gamble, Colgate-Palmolive, Johnson & Johnson, Unilever, Reckitt Benckiser, Henkel and L'Oreal.

 

By concentrating on selected products in a few markets - Nigeria, the UK, Indonesia and Australia - PZC can compete on an equal footing with these consumer product giants.  PZC claims it is the CAN DO company and it finishes its vision statement with We do well, we do good and we have fun! The founding family controls 35% of the company's shares.

This year Manchester-based PZC celebrates 40 years of uninterrupted increases in its dividends. And the company has a good trading record. Consider:

1.       Earnings per share (EPS) increased smoothly throughout the financial crisis. From 2006-8 to 2012-14 EPS has increased by an average of 6% per annum cumulatively. Net margins are a healthy 11%.

2.       Return on equity averages 12%. While this is hardly spectacular, it has been achieved without any substantial gearing. In most years, the company has held net cash. In its interim accounts of November 2013, net debt was 18% of equity, inflated by the purchase of an Australian baby food company for cash. The company pays just 2% for its sterling denominated loans.

3.       Net asset value has increased by 7% per annum from 2006 to date.

4.       In the past five years, net operating cash flow has covered the dividend by 2.6 times. 

PZC's share price (in blue) has matched Reckitt Benckiser's (in red) in the last 10 years and it has been a far superior investment to Unilever (in yellow), which suffered from listless management in the mid-2000s.

 

Graph courtesy Google, click to enlarge

Markets

PZC's largest single market is Nigeria, accounting for 36% of its sales and one-third of its profit. Here the company has market-leading personal care brands and it is the largest distributor of white goods. Sales have barely increased in the past 5 years, with the difficult security situation in the North of the country cited as a reason. This has not stopped PZC investing further in Nigeria via a joint venture in palm oil plantations and a refinery with Wilmar International. Based in Singapore, Wilmar, with revenues of US$44 billion, claims to be the global leader in the processing and merchandising of palm oil. The palm oil refinery has begun to contribute to PZC's results in fiscal 2014 (the year end is May) and at the interim Nigerian sales were up by 6% and profits up by 13%. PZC has much smaller sales to Ghana and Kenya.

PZC derives 38% of its sales and 42% of its profits from Europe. Sales have increased by 20% and profits by 30% since 2009. Well over half of European sales are in the UK, where Imperial Leather is PZC's main brand. PZC also sells the leading UK antibacterial hand wash, Carex, and beauty products under the St Tropez label and others. The company has successfully launched a range of products for mother and baby, called Cussons Mum & Me. The remaining European sales are in Poland, Greece and Germany.

The Asian business, with revenues up by 30% since 2009 and profits up by 80%, is the fastest growing region for PZC. It now accounts for 15% of sales and profits. PZC's main markets are Indonesia and Australia (an honorary Asian). PZC concentrates on beauty products, including its Imperial Leather brand, in Indonesia. After reorganising its Australian dishwashing, detergent and soaps business, the company acquired Rafferty Garden, which manufactures baby foods, for 42 million pounds in July 2013. Rafferty contributed just under 1 million pounds to profits in the first few months of fiscal 2014. PZC plans to take the brand outside Australia.

PZC Nigeria has refined a distribution system for a large, poor, dispersed population that is served by poor infrastructure. This experience has evidently been used to set up its distribution in Indonesia, which shares, in this respect, the same challenges as Nigeria.

Supply chain optimisation programme

In March 2012, the company announced a plan to reorganise its manufacturing facilities with two aims:

Ø  Reduce its reliance on high cost manufacturing facilities in Australia and Ghana and, possibly, Poland and elsewhere.

Ø  Reduce overheads associated with manufacturing and move to a variable cost procurement model.

The initial cost was estimated at 39 million pounds, half in write downs of plant and machinery and half in cash disbursements. The payback on the cash element was estimated at less than three years. In its April 2014 trading update, the company reported that "the supply chain optimisation programme was completed on budget early in this financial year, and the realisation of the benefits remains in line with previous expectations."

The final cost for the three years 2012-2014 will have been 56.4 million pounds. 2014 results will include the final charge of 20 million pounds, which the company says will be offset by the profit on the sale of its Polish homecare business.

Outlook

In the short term, the strong pound is an obstacle for a company that has 78% of its business outside the UK. However PZC has confirmed that it is trading in line with expectations, and expectations are for 18p 2014 earnings per share and a dividend payout of 8p. At the current share price of 355p, that leaves the share on a prospective PE of 20 and yielding 2.2%.

Longer term the company is moderately optimistic (14 April 2014 trading update):

"Looking ahead, the Group is focussed on a dynamic and fast brand renovation and innovation programme, an ongoing cost reduction programme and successful delivery of new areas of growth such as Rafferty's Garden and the Wilmar joint venture. These initiatives will help counter the ongoing macro challenges and the reduction in profits from Poland as a result of the homecare sale."

My valuation model values PZC's shares at around 310p.* This assumes that PZC meets its earnings forecast for the year ending May 2014 and that the company continues its steady rate of growth supported by cash generation. Given that the strong pound is likely to be a passing phenomenon and that the two new businesses should be contributing significantly to earnings, these are fairly realistic assumptions. *Assumptions: EPS growth 6% p.a., ROE 12%, equity per share growth 7%, 50% dividend payout, average PE ratio of 23, all discounted at 8.3% for the years 2014-18.

The seasoned investor will note:

·         The supply chain optimisation programme was designed to reduce product cost. But competitors will also be reducing costs. Consequently, such investments often lead to fewer benefits than originally calculated. They are necessary to stay in business.

·         The palm oil joint venture was agreed in 2011 when the price of palm oil had reached a peak. The price of palm oil has fallen by 32% in US$ since then, which must have reduced the project's rate of return.

·         Nigeria is facing a well-publicised insurgency in the North East, which could destabilise the country. However, PZC has long experience of trading in West Africa.

·         The share price reached a one-year high of 439p in September 2013 before falling to a 320p low in March 2014. Three directors sold shares worth 0.6 million pounds in August 2013 at 390p a share. There have been no significant director share purchases.

·         PZC carries on its books a 28.5 million pound receivable from Wilmar. However, the company acknowledges that this is not collectible and is, in practice, an investment in the joint venture. This odd state of affairs is not explained and should be regularised. If it is written off, then this is a large charge for a company that recorded a pre-tax profit of 95 million pounds in 2013.

·         Although the defined benefit pension scheme was closed to new accruals in 2008, it might require further funding by the company.