Wednesday, August 10, 2016 11:32am /FBNQuest Research
Price target revised upward
Presco had a remarkable 71.3% y/y growth in sales in Q2 2016. The results were ahead of our forecasts as sales and PBT beat by 33% and 116% respectively. Price and unit volumes grew 55% and 75% y/y. Consequently, we have increased our 2016-17E EPS forecasts by 20.9% on average and our price target by 24.1% to N44.0. We have also rolled over our valuation to 2017.
Our new price target implies a potential upside of 13.4%. Although we increased our risk free rate assumption by 200bps to 14.5%, its impact on our price target was offset by the increase to our earnings forecasts and rolling over to 2017. At current levels, the shares are trading on a 2016E P/E multiple of 10.3x for a 4.3% EPS growth in 2017E. The shares have gained 17.7% ytd (NSEASI: -4.5%). We retain our Neutral rating.
Q2 2016 sales and PBT up 71% y/y and 233% y/y respectively
In Q2 2016, Presco’s sales grew by 71.3% y/y to N4.3bn; PBT and PAT also grew by 233.1% y/y to N2.3bn and 154.3% y/y to N1.6bn respectively. The PBT growth was supported by a 1,301bp y/y expansion in gross margin to 63.6%, a 2,152% y/y increase in gains on biological asset revaluation to N405m and a 613.2% increase in other operating income to N389m.
These positives completely offset a 134% y/y increase in opex and fx losses combined. Fx losses on capex amounted to N717m in Q2 (vs N17m in Q1) due to the adoption of a flexible exchange rate regime by the CBN. Although income tax expense increased significantly to N716m from N65m in the prior year, PAT still grew 154.3% y/y to N1.6bn.
The underlying results (ex-biological asset revaluation gains) show that Q2 PBT grew by 175.1% y/y while PAT grew by 90.5% y/y. On a q/q basis, sales grew by 36.3% q/q while PBT and PAT grew by 29.6% q/q and 15.3% q/q respectively. The H1 figures showed that sales of N7.5bn grew by 60.5% y/y; PBT and PAT both grew by 164.7% y/y and 152.9% y/y to N4.1bn and N3.0bn respectively.
Presco recently commenced export of crude palm kernel oil. As such, we expect a further boost to topline growth in H2, in addition to market share gains on the back of competition (importers) struggling to obtain fx.
The company is also striving to reduce its production costs. Gross margin averaged 63.3% in H1 while N1.7bn was spent on capex out of a N3.3bn target. Our revised outlook for 2016E are sales growth of 38.8% y/y and EPS growth of 115.8% y/y.