Wednesday, March 22, 2017 08.43PM / ARM Research
CPO price boon drives top-line to record high:
Presco, as the only integrated oil palm production company in Nigeria4 benefitted immensely from favourable pricing environment which underpinned a strong rise in both top-line and earnings. Importantly, Presco’s 9M 16 sales of N11.9 billion (+48.4% YoY) eclipsed previous sales peak of N11.3 billion in FY 12, buoyed by higher CPO prices and to a lesser extent modest volume growth, which we estimate rose 7% YoY. Given upward local price movement in Q4 16 (+106% YoY), we estimate Q4 revenue at N4.5billion (+85.1% YoY) which brings FY 16E sales to N16.4 billion (+57% higher than historical average).
Subdued cost movement buoys operating profit:
In addition to the robust turnover, costs rose tamely over the period (9M 16: COGS: +3.4% YoY, OPEX: +37.8% YoY) reflecting economies of scale and deferral of cultivation activities to Q4 16. Consequently, operating profit blossomed, rising nearly two-fold (+86.5% YoY) with related margin expanding 11.4pps YoY to 55.8%. Ahead of the Q4 16 results, whilst operating margin should remain robust relative to trend level (31%), we expect upsurge in input cost (+62% YoY) to apply downward pressure, against the backdrop of increased clearing activities related to the dry season. Overall, we project an EBIT margin of 39.8% over Q4 16, bringing full year operating margin to 52% (+14.5pps YoY).
Higher Biological asset gains propels earnings:
Another catalyst to Presco’s result is the upsurge in biological asset gains (+98% YoY to N4.4 billion) reflecting impact of higher CPO prices as well as improved yields on the company’s biological asset. This together with lesser finance charges (-27% YoY to N423 million) helped offset losses on foreign exchange translation (+92% YoY to N967 million). Having repaid all its outstanding external debt, the FX loss stemmed from dollar financing for the purchase of chemicals and fertilizers, equipment, and spare parts, all which according to management contributes 20% of its entire cost. Consequently, earnings surged 98% YoY to a record high of N6.8 billion.
Excluding the biological asset gains, PAT would have been 99% higher at N2.4 billion. Given flat movement in FX rate over Q4 16, which portends lower FX loss, as well as higher CPO prices which bodes well for biological asset gains, we project the final quarter’s bottomline to print at N1.1 billion (Q4 15 loss after tax of N1.1 billion) bringing full year earnings at N7.9 billion (+239% YoY, 2016E core earnings: +161% YoY to N3.3). We forecast DPS to rise 102% YoY to N2.02 using a four-year average dividend payout of 25%.
Bullish trend in global crude palm oil prices as well as further naira weakness could see local crude palm oil prices resume its upswing. This together with increased assess to concessionary borrowings from the CBN, which would result in the abandonment of expensive commercial loans could bolster earnings.
Presco is trading at a current P/E of 8.27x (19.21x excluding gains from biological asset) vs. 10.1 for its Bloomberg Africa peers. Net impact of adjustments to our model result in upward adjustment in our FVE to N68.84 for the stock from N48.70 previously. Consequently, we upgrade our rating on the stock to BUY (vs. NEUTRAL in previous communication).
1. Nigerian Palm Oil Sector: Waxing Strong Under Policy Cover
2. Nigeria Oil Palm Industry: Time to Extract Trapped Value – Proshare Jun 07, 2016
3. Nigerian Palm Oil sector Update - Still a Promising Growth ... – Proshare Oct 04, 2016
4. Nigerian palm oil sector – (PDF) Proshare Oct 04, 2016
5. Presco Plc - Still on Track for a Stellar 2016 - Proshare
6. Positive Earnings Outlook in H2 2016 for Presco Plc - Proshare
7. Audited report for the period ended 31 Dec, 2015 - Presco Plc - Proshare
8. Unaudited Q3 report for the period ended 30 Sep, 2015 - Presco Plc