Presco Plc, Nigeria’s crown jewel in the oil palm industry, is at a crossroads.
With a bold N100 billion bond issuance, to fund the acquisition of Ghana Oil Palm Development Company Limited (GOPDC), the company is poised for transformative growth.
This calculated gamble could redefine Presco’s growth trajectory while testing its ability to manage increased leverage effectively.
But does this increased leverage make it a Buy, Hold, or Sell? How will it impact financial performance, health, and returns to shareholders?
How will it shape investor sentiment and confidence in the company’s prospects?
If managed well, increased leverage can amplify shareholder returns, particularly when the resulting investments enhance profitability.
For the first nine months of 2024, the company achieved a remarkable return on equity (ROE) of 61.17%. This impressive ROE was skewed to the robust net profit margin of 40.26%, and improved asset turnover
Its share price has been bullish. In 2024, the share price surged by an astounding 146% year-to-date, ranking it as the best-performing stock in its sector.
This followed a resilient, inflation-adjusted gain of 40.36% in 2023. The positive momentum has carried into 2025, with Presco posting an 11.6% year-to-date gain as of January 10, making it the 39th best-performing stock on the Nigerian Exchange (NGX).
Looking at the financial performance, it appears investors are happy with its performance and thus this has been reflected in the share price rally.
Key financial performance
In 2023, Presco PLC recorded a revenue of N85 billion, a 23% increase from the prior year, driven by price adjustments and a 15% growth in sales volume.
The company’s profitability metrics were impressive, with an operating profit margin of 43.5%, up from 36.7% in 2022. Pre-tax return on assets and equity also improved to 35.1% and 65.8%, respectively.
- Presco generated an operating cash flow (OCF) of N29 billion, sufficient to cover finance costs of N15 billion in the same period.
- Additionally, its low leverage metrics, evidenced by an interest-bearing debt-to-equity ratio of 54%, highlight its capacity to sustain current operations while funding growth initiatives
- The trend continued in 2024. In the first nine months of 2024, Presco PLC reported revenue of N97 billion, reflecting a 14% increase compared to the corresponding period in 2023.
- The company maintained strong profitability, with a gross profit margin of 45.6%, slightly above the 44.3% achieved in the same period last year.
- The planned acquisition of GOPDC is set to bolster these numbers further. With 21,000 hectares of oil palm plantations and established processing facilities, GOPDC represents an opportunity for Presco to diversify its revenue base geographically while leveraging cost synergies and economies of scale.
However, the cost of this ambition is high. The bond issuance will increase Presco’s debt levels currently at N58 billion, raising questions about its ability to maintain profitability in Nigeria’s high-interest-rate environment.
Affirming this ability, Agusto & Co. has assigned the company a solid rating, reflecting its capacity to navigate heightened leverage.
According to the ratings agency, Presco’s estimated cumulative revenue of N3.5 trillion over the next seven years, along with its robust EBITDA coverage ratio of 11x for interest payments indicates its capacity to manage the planned debt obligations effectively.
This assessment aligns with Presco’s financial performance for the nine months of 2024. The company’s interest coverage ratio for the period stood at 8.88x, indicating that it earns nearly nine times more operating profit than required to cover its interest expenses.
This robust metric highlights Presco’s ability to meet its debt obligations comfortably, providing reassurance to both current and potential investors.
Valuation metrics
Building on its strong financial performance and strategic growth initiatives, Presco’s valuation metrics appear to align with this investment appeal.
The earnings multiple at the current share price is 8.67x compared to the trailing P/E ratio of 7.94x as of the close of December 2024.
- This uptick suggests that investors are willing to pay slightly more for each naira of Presco’s earnings now than at the end of the previous year.
- This could reflect heightened investor confidence, optimism about the company’s future earnings potential, or anticipation of benefits from the GOPDC acquisition.
- The stock’s outperformance; trading at a 52-week high of N530, above analysts’ price target of N450, appears to align with this heightened investor confidence and optimism about Presco’s future.
- At its current price levels, investors should assess whether the stock’s valuation has already incorporated its future earnings growth and strategic benefits, such as the GOPDC acquisition.
- The fact that the stock is trading above analysts’ price targets suggests that the market might have already priced in significant optimism about its prospects.
- Moreover, with a beta of 0.8007, the stock demonstrates lower volatility compared to the broader market, which can be appealing to risk-averse investors.
- However, this also means that the stock is less likely to experience dramatic price swings, potentially capping upside gains even in a bullish market environment.
- This raises a key consideration: Is there sufficient room for further upside, or has the stock’s premium valuation reached a level where additional gains are limited?
- Investors should weigh the beta’s indication of stability against the stock’s already optimistic pricing to decide if the current price fully justifies its future growth potential.
- Overall, Presco may remain a Buy for long-term investors who are confident in the company’s ability to leverage the GOPDC acquisition for future profitability and expansion.
- These investors should be comfortable with the stock’s lower volatility and may not expect dramatic price movements in the short term, but rather steady growth over time.
- For risk-averse investors, while the stock’s low beta can be appealing for those seeking stability, the stock’s premium valuation warrants caution.
Risk-averse investors should closely monitor Presco’s earnings trajectory and leverage levels to ensure that the company can continue to deliver on its growth prospects and that its valuation remains justified in the context of its actual performance
