Questor: soap maker has gained 36pc in a year but hasn’t entirely slipped through our fingers

Looking at them from the narrow perspective of investment, rather than personal choice or lifestyle, this column is very keen on brands.

When properly nurtured, through marketing and product development, they bring consumer loyalty. That in turn brings pricing power and gives a company the chance to sell its goods and services at the prices it wishes to charge rather than at the (lower) levels that customers dictate and are prepared to pay.

Pricing power therefore bolsters margins, fat margins bolster cash flow and cash flow means sound finances and room to pay dividends.

This brings us to PZ Cussons, the proud owner of Carex hand gels, Imperial Leather soaps and St Tropez tanning products. Troubles in an important market, Nigeria, a period of underinvestment and uninspired marketing have cost these names some lustre and the company’s after-tax profits have slumped from a peak of £85m in the year to May 2014 to £47m in the 12 months to May 2020. Yet all may not be lost.

The chief executive, Jonathan Myers, took the reins a year ago and has swiftly launched a turnaround plan, helped by his experiences at and insights from his previous posts at branded goods giants such as Avon, Procter & Gamble and Kellogg’s.

First, investment will focus on eight of PZ Cussons’ brands and three areas – hygiene, baby and beauty – in the four key markets of Britain, Australia, Indonesia and Nigeria. The eight brands drive half of the FTSE 250 firm’s sales and two thirds of its profits, so they will receive three quarters of marketing spending in future to defend and strengthen their competitive position in the marketplace.

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Second, the other 42 brands still have their role, either as growth opportunities (and possible future priority names) or cash cows, although one, a yogurt business in Australia called Five:AM, was sold last month.

Finally, management is looking to improve performance in Nigeria, where a complex business structure has exacerbated the problems presented by oil price volatility, recession and devaluations of the local currency, the naira.

Self-help will be the order of the day as PZ Cussons again focuses on core brands, in this case Premier Joy, Morning Fresh and Cussons Baby. It will be interesting to see if management persists with its electrical and edible oils businesses in the country, although the board seems firmly committed to both.

None of these changes is likely to happen overnight but the shares are already 36pc higher than a year ago. This does not mean that the gels and soaps specialist has entirely slipped through our fingers, however. The stock still trades a good 40pc below the highs reached in 2010 and 2013 and profits are well below past peaks.

Moreover, the shares could still offer good value if the recovery plan meets its goals of annual percentage sales growth in the low to mid-single digits, a mid-single-digit operating margin in Nigeria and a mid-teens operating margin for PZ Cussons as a whole.

In the year to May 2020 the company managed an 11pc operating return on sales, before exceptional items, down from a peak of more than 13pc in the fiscal year to May 2014.

Management wrung cash out of the balance sheet last year as they did a good job in sweating working capital. That helped to reduce net debt to just £32m, adjusting for a pension surplus and lease commitments, so there is no ticking clock when it comes to interest payments or repayments of loans.

That leaves scope for the all-important investment in products and marketing, as well as a modest but now well covered dividend after a cut last year.

A forecast price-to-earnings ratio of more than 20 may not jump out at value hunters, but that partly reflects the way in which earnings have consistently declined since that 2014 peak.

Achievement of the company’s financial targets would boost earnings and thus lower the multiple over time, all other things being equal. Patience will be required but PZ Cussons could yet give shareholders a chance to clean up in the coming years.

This looks like a turnaround story worth following.

Questor says: buy

Ticker: PZC

Share price at close: 245p

Russ Mould is investment director at AJ Bell, the stockbroker. 

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.