Presco Oil is a leading Oil Palm Producer in Nigeria. The company is into oil palm cultivation, extraction, refining and fractionation of crude oil palm into finished products. The company has its plants in Edo and Delta States respectively which also doubles as its operational base(s). As at 2010 it was 60% owned by Siat NV and 8% belonging to the duo of First Inland Bank and Fidelity Bank. Siat is a company incorporated in Belgium and also has investments in Ghana, Ivory Coast and Gabon with various interest in rubber and oil palm plantations. It has been a PLC since 2002.
Since the last IBTC review of Presco Plc in May its share price has risen from N13.65 to about N14.97 today. The company has grown its revenue in leaps and bounds as this report shows. Its net profit of N1.69b in 2011 is a 55% increase from the prior year. Its average Return on Equity is also an impressive 41% for the year compared to 36% for the prior year. This makes the stock an attractive buy to any value investor out there. However, they (IBTC Research) estimate the ROE may drop to 34% this year, still impressive by any standards. This year, the company has continued with its impressive ability to grow revenue churning out a nicely N2.2b in Q1 compared to N1.5b (over 200% growth. A growth in revenue of 48% tells you this company has a near monopoly of market in whatever it is doing. Currently they are probably the only company into oil palm cultivation, extraction etc. Operational profit margin increased from 28% in 2010 to 33% in 2011 and expected to hit 40% in 2012. This shows the company’s ability to reign in on cost whilst increasing revenue. Kind of stuff I like. The company has also consistently rewarded shareholders with dividends over the years averaging just 46kobo over the last 5years. N1 paid in 2011 is perhaps the highest in the last 6 years. Dividend payout ratio averages 67%, so for an investor willing to rely on dividends as a source of investment returns, you might find this acceptable. It just means they pay out on average 67% of profits as dividends whilst reinvesting the balance. In 2011, dividend payout ratio was 59% below the 5 year average. I learnt the company intends to retain a consistent 50% payout ratio. But the company has debts….plenty debts. In fact its debt to equity ratio was 66% in 2011. Reason why its cash flows is mostly under strain. In fact in 2010, its total debt pay outs (Interest and Principal) was more than its operational cash flows. Same occurred in 2011. Couples with the need to spend money on Capex, the company may run into liquidity issues if it does not get its house in order or get a bail out from the parent company (which is why Im not screaming hell).
This is the tricky part. Everyone has their own valuation metric and some several depending on the company’s dynamics. Presco does appear cheap at a Market Value of N14.9b . But is it? Well, lets try two things. Supposing I decide to value the company based on its free cashflows. Free Cashflows means all the cash the company is able to generate free of taxes, working capital and capital expenditure. Free cashflow basically is cash that is theoretically left for the equity and debt providers. Currently the company’s free cash flow is a negative N3b for 2011 making this method null. But it is projected to reverse to positive N2.4b. If I decide to buy the whole company I should expect returns of at least 20%. That should value the company using free cash flow at N12b right? Right!! But then what about the debt? If I deduct its N2.3b debt that puts the value at N10b, N4b less than its current value. Ok, Id use another method, this is just too ajebu. The company generated Ebitda of N2.7b in 2011 and it is expected to hit N4.45b in 2012. That is optimistic isn’t it. Well, yes based on its quarterly projections. So we use N4.7b over its projected returns on equity of 34% and that gives us N13.8b, deduct N2.3b then you get N11.5b. N3.5b less than current. Ok lets lets use its Price Earnings. A cheap price to buy a stock should range between 0-10X, so lets use 10x. At 10times its 2011 earnings per share of N1.69 we get N16.9b and less N2.3b gives us N14.6b, slightly less than its current value of N14.9b. They project the company’s EPS for 2012 to be N2.69 which even values the company higher at N26.9b. Less N2.3b is N24.6b. Whether you share in the optimism is a different issue, for me not sure I do.
I like to buy cheap and hold long or buy cheap and sell high. Well, everybody does that so hey. One thing is for sure though, Presco is a buy for me, I like the fact that they have a near monopoly (even though that may be shaken as the government has relaxed its importation policy on a product they sell). Only question is when do I buy? At N14.9 ,I probably missed the opportunity to buy the stock, as this price is expensive to me. To compound my predicament It was N8.8 on my Birthday, 21st Feb this year, so I missed out on a perfect birthday opportunity. Had I invested N1m then, it will be worth about N1.7m today!!!! Highly exasperating!!
So I will wait and hope again till the shares crash to N10 and hopefully lower. N15 to me is the peak and anything above that is overpriced. Think about it, for a company that pays 50% of its profits as dividend an estimated dividend of N1.21 for 2012 gives you a dividend yield of 8% (if you wanted to hold long on the stock). Meaning you are probably better of buying a government bond at earning 14% risk free. But if I get lucky and buy for N10 I get a yield of 12% and at a projected N1.42 for 2013 it rises to 14.2%. Some may bet on the value growing continuously which is very logical and a perfect hedge for your investment. If you are looking for a long term buy, then buy now!!!! But for me, I will wait to buy at N10. How that is possible, well, leave that to me.