Presco Plc. (12 months ended December 2014 and 3 months ended March 2015)
- Presco Plc released audited results for 12 months ending 31st December 2014 as well as unaudited Q1 2015results. Onthe FY 2014 results, revenues rose 7.7% YoY to N9.1 billion while PBT and PAT were 46.5% and 94.8% higher YoY at N3.4 billion and N2.6 billion respectively.
- Presco also announced a N1 dividend per share which implies a payout ratio of 38.4% (FY 13: 7.5%) and a yield of 3.5% using its last trading price.
Robust volume growth offsets impact of tame CPO price
- Q4 14 revenues extended the recovery witnessed in last three quarters climbing 10.7% YoY to N2.2 billion (Q4 14E: N2.3 billion). Higher volume sales which management attributes to improved yields on maturing plantation areas more than offset the impact of softer CPO prices (YoY: -17.2%, QoQ: -6.12%) underpinned by global supply overhang. A similar scenario played out over FY 14 as volumes push offset impact of lower mean CPO prices (-3.2% YoY) resulting in 7.7% YoY topline increase.
Spike in admin cost weighs on operating margins
- Similar to Q4 13, Presco recorded negative COGS over Q4 14—likely on audit inducedre-classifications—which makes an examination of the likely drivers behind the quarter’s gross profit (+42.5% higher YoY at N3 billion) difficult. The Q4 14 reclassifications drove a 17% YoY contraction in FY 14 COGS to N3.2billion and boosted the year’s gross profits (+29% YoY to N5.9 billion) with related margins at an eight year high of 65% (+10.6pps YoY).
- Q4 14 operating expenses jumped higher (more than threefold YoY to N2.1 billion) underpinned by spike in admin costs (fourfoldYoY surge to N1.98 billion) with S&D costs rising marginally (+5.7% YoY to N169 million). The jump in admin costs which pushed opex-sales to a record high of 97% (+64.5pps) possibly suggest reclassification from COGS or an under accrual of expense items in prior quarters. We would be seeking clarity from Presco as to the nature and scope of these reclassifications. Largely reflecting the spike in opex, EBIT contracted 41% YoY to N731 million with related margins shrinking 29pps YoY to 33%. The jump in Q4 14 opex resulted in FY 14 reading more than doubling YoY (opex-sales ratio: +18pps YoY to 38.6%) and dragged FY 14 EBIT 17.4% lower YoY to N2.4 billion with related margin shrinking 8pps YoY to 26.7%.
Nevertheless, softer biological asset valuation loss drives positive earnings growth
- The on-streaming of more matured oil palm hectares helped offset impact of CPO price moderation resulting inPresco reportinga 71% YoY contraction in biological asset loss to N290 million. The impact of lower valuation loss and 69% YoY decline in finance costs to N185 million as borrowings fell 18% YoY to N4 billion spurred earnings growth. PBT rose three-fold YoY to N414 million with related margin expanding 11.2 pps YoY to 18.7% while Presco recorded an after tax profit of N387 million vs. after tax loss of N318 million in Q4 13. Over 2014, Presco recorded biological assets gains of N1.3 billion as against losses of N223 million in 2013 which together with 7.1% YoY decline in finance expense N363 million drove bottom-line growth.
Volume growth continues to underpin top-line
- Q1 15 revenues extended 2014’s positive pattern by rising 2.1% YoY to N2.2 billion underpinned by higher volume sales which management attributed to improved yields on maturing plantation areas amid soft CPO prices (YoY: -23% YoY, QoQ: -4%).
Figure 1: CPO Price Trend
Source: Index-Mundi, ARM Research
Lower cultivation activity and biological asset valuation gains underpin margin expansion
- Q1 15 COGS fell 21.5% YoYto N799million possibly reflecting lower cultivation activities over the period. Consequently gross profit expanded 24% YoY to N1.4 billion with gross margin rising 11pps to 63%.
- Notwithstanding pressures from opex which surged 22.5% YoY higher to N449 million (opex-sales ratio: +3.5pps YoY to 20.8%) as well as 62% YoY contraction in other operating income to N29 million, gross margin gains filtered through with EBIT rising 16.5% YoY to N934million while its corresponding margin climbed 5.4pps YoY to 43%.
- Presco recorded gains on biological asset of N79 million in Q1 15 (Q1 14: N151 million) which neutered the impact of rising finance expenses (nearly tripled YoY to N153 million). Consequently, PBT and PAT rose 44.3% and 37% YoY to N860 million and N557 million respectively with corresponding margins jumping 11.7pps and 6.6ppsYoYto 40% and 26% respectively.
Improved plantation yields and naira devaluation poses upside to revenues
- Current results suggest depressed CPO prices over 2014 drove an industry wide focus on pushing volumeswith Presco and peer Okomu reporting higher revenues. Outlook for global CPO prices remain largely bearish on account of continued supply overhang from leading exporters (Malaysia and Indonesia – over 80%) and record production of substitute (Soybean oil). Nonetheless, recent naira devaluation provides upside potential as importers (~36% of domestic supply) who constitute a major source of industrial CPO supply (80% of domestic CPO production is via subsistence farmers) attempt to pass on higher costs to consumers which should drive uptrend in domestic CPO prices.The prospect of higher domestic CPO prices as well as management’s guidance to raising volumes on higher yields from freshly maturing plantations underpin our expectation of 6% YoY revenue growth over 2015. Farther out, Presco guides to on-streaming of 1000 hectares per annum of immature plantation over the next five years which informs our CAGR revenue expectation of 13% over the period. Pending clarity on the nature of 2014 COGS re-classifications, we expect sizable cultivation activity (which management estimates at an average of 1000-1500 hectares each year through to 2020 with 1500 hectares of oil palm planting scheduled for 2015) and costs associated with its budding rubber factory to drive average gross margins of 47.7% (2010-2014 avg: 51.2%) over our forecast horizon. Nonetheless, the high 2014 opex base offsets gross margin pressures and largely drives our expectation for higher earnings over 2015E (+12% YoY).
- Presco trades at a 2015 P/E of 12.2x(Adjusted for biological asset valuation gains: 18.3x) relative to peer Okomu at 9.7x (Okomu does not report biological asset valuation gains on the income statement electing to report it under other comprehensive income). Presco has risen 18.3% YTD (Okomu’s +12.5%) with last trading price at a 4% discount to our FVE (N30.01) which leaves our SELL rating unchanged.
- Source: ARM
Disclosure – This article was culled from ARM Research newsletter and was not solely written for Nairametrics. The author of this article wrote it themselves, and did not write this article on behalf of Nairametrics.