NOTE: PRESCO HAS SINCE UPDATED THEIR ACCOUNTS CORRECTING THE ERRORS. HOWEVER, I DECIDED TO LEAVE THIS BLOG POST FOR REFERENCE. 24/4/2013
If you have been following my blog then you’d be familiar with my likeness for Presco Plc. As an indigenous Oil Palm company the company is in the forefront of those leading non-oil exports for Nigeria. I have blogged about them twice in the past and at that time I recommended a buy and hoped it will drop to a price of N10 (even though it was N14 at the time) for value hunters like me to buy. Today their share price is N22.5 and has risen 125% Year on Year. Why the alarming headline then???
Presco released its 2012 full year earnings with revenues rising 31.8% to N11.2billion. Gross profit also increased 106.5% to N8.3billion as the company reduced its direct cost from N4.4billion to N2.8billion in just one year!!!. Operating profit increased from N3billion in 20111 to N9.2billion in 2012 following a massive 89% drop in overheads to N182million. This company must be some draconian cost cutting spree!! Expectedly, profit after tax increased in tandem from N1.7billion to N8.5billion at the end of the year. Now this is a remarkable feat by no small measure and it is important one knows why and how it happened.
How did they get here?
Since I obviously do not have answers to why I can attempt to understand how they got here. Looking at the result, it is easy to conclude the 377% rise in profit after tax is as a result of a huge cost cutting drive as the company reduced operating expenses and cost of sales by about 130% and 35% respectively when compared to the prior year. Yet they increased revenue by 31.8%. Digging deep one wonders how they were able to reduce cost of sale to N2.8billion while yet growing revenue. Also, the company reported zero selling and general expenses for the year only accounting for N182million as distribution expenses only. That was a red flag for me and so I had to dig into their nine months results which I reviewed in the past. At the end of september 2012, the company reported that it incurred about N1billion on SG&A and distribution expenses and another N3.3billion on cost of sales. How did a combined N4.4billion in direct cost and expenses (in 9months) get reduced to just under N3billion in the remainder three months??
One could say even if you estimated a cost and expenses of about N5.5billion (going in line with the 9 months result) profit will still be an impressive N6billion or so why the alarm. However, a slight indication of unclear financial reporting is enough for any serious investors to dump the shares of a company. I hope they come up with a logical explanation soon enough or probably just tell us there was a typo in there somehow.
How good is this result
Without being prejudiced I will decline to give an opinion on the results as it fails to give any reasonable explanation. Too many questions to be answered to enable one make an informed investment decision. Hopefully, there will be some clarification soon.
Is the stock worth buying?
As mentioned above, Presco on the back of its past year is a buy and hold stock. The current price of N22.5 representing about1 2.6x of trailing earnings (2011 PAT) price to book ratio is 1.3x for the most recent quarter. This current result if it stands will further reduce P.E ratio to about 2.6X making the stock look like a candidate for a rally. The company on the back of this result also declared a dividend per share of N1 same as what it declared in 2011. At N22.5 the stock is appears cheap making my desire for a N10 price a pipe dream. Ironically the stock lost N2.5 in value after announcing this result yesterday!!