Although Presco’s Q4 2017 results came in ahead of our estimates, its Q1 2018 results surprised negatively – sales and PBT were behind by -20% on average. As such, we have reduced our earnings estimates over the 2018-19E period by -5% on average. Despite the cut, we have increased our price target by 12% to N85.1 mainly because of positives arising from our decision to reduce our risk free rate assumption by 100bps to 13%. The adjustment is on the back of declining yields on government securities. Presco shares are trading on a 2018E P/E multiple of 11.8x for an 11% y/y EPS growth in 2019E. The shares have returned +9.5% this year (ASI: +2.8%). Despite the recent rally, we still see upside potential of +13.5% to our N85.1 price target. We retain our Neutral rating on the shares.
Q1 2018 PBT and PAT declined by -33% y/y on average:
Presco’s Q1 2018 results showed sales declined by -8% y/y to N6.6bn. In addition to the sales decline, gross margin contracted by -195bps y/y to 77.9% while operating expenses and net finance charges increased by 17% y/y and 135% y/y respectively. Consequently, PBT declined by -32% y/y to N3.4bn. Owing to a slightly higher tax rate of 24% (versus 23% in Q1 2017), PAT declined by a -33% y/y to N2.6bn. Q4 2017 results showed sales growth of 44% y/y to N5.4bn. However, PBT declined by -86% y/y to N3.0bn. Despite a 2,038bp y/y gross margin expansion to 81.8% and the strong sales growth, these were not strong enough to offset a 133% y/y rise in opex, a 29% y/y increase in net finance charges and an -85% y/y reduction in biological asset revaluation gains to N3.1bn. If we strip out the biological asset revaluation gain, the underlying results reveal that the company made a pre-tax loss of –N62m for the quarter.
Outlook remains positive:
The domestic palm oil producers continue to be in an advantageous position owing to the significant supply deficit in the country and government policies which have encouraged local production. Last year, Presco improved on its plantation expansion drive. However, despite our positive view on the sector, we flag that the company’s pricing power could be at risk in the near term due to the return of importers/smugglers of palm oil who were crowded out when FX was not readily accessible and rates were not favorable. For 2018E, we see sales and PBT (excluding biological asset revaluation gains/losses) growing by 8% y/y and 11% y/y respectively.
FROM FBNQuest Capital Limited.