Wednesday, May 03, 2017 9:22 AM / Vetiva Research
· Bullish line performances amidst strong product pricing
· EBIT beats estimate, up 167% y/y
· PBT almost triples even after excluding revaluation gains
· Improved plantation yield to drive FY’17 volume growth
· Valuation revised higher on improved earnings outlook
Strong domestic palm oil prices lift earnings
PRESCO’s Q1’17 earnings came in very strong with all profit lines more than doubling y/y.
In line with the trend observed in 2016, the impressive performance was primarily driven by strong domestic palm oil prices amidst the inclusion of the product on CBN’s 41-item list not eligible for official FX funding.
Buoyed by the price effect, Q1’17 revenue rose 125% y/y to ₦7.2 billion, beating our ₦6.2 billion estimate.
Excluding Gains on revaluation of Biological Assets (up 150% y/y to ₦633 million), EBIT over the three-month period rose 167% y/y to ₦4.7 billion (Vetiva: ₦3.1 billion) – c.70% of the profit recorded in FY’16.
With finance expenses coming just in line with expectation, PBT (without revaluation gains) rose 185% y/y to ₦4.4 billion, 49% ahead of our estimate.
Further price increases to be modest, volume growth seen higher
According to the management, domestic CPO prices have come off slightly amidst the recent improvement in FX supply and the consequent strengthening of the naira in the parallel market (Ytd average CPO Price: ₦490,000/MT vs Dec’16: ₦600,000/MT).
Considering the improved outlook on Nigeria’s FX earnings and the potential upside to the currency (particularly in the parallel market), we expect local CPO prices to be capped by a single-digit growth in 2017.
Meanwhile, going by management’s guidance, we expect some growth in PRESCO’s volume in FY’17 on the back of anticipated improvement in average plantation yield to 16MT/ha (FY’16: 14MT/ha).
This is expected to drive PRESCO’s Fresh Fruit Bunch to 200,000 MT in FY’17 (FY’16: 171,000).
After updating our model to adjust for the better-than-expected Q1’17 as well as our updated views on price and volume, we revise our FY’17 revenue higher to ₦23.8 billion (Previous: ₦20.7 billion).
Valuation revised higher on improved earnings outlook
PRESCO plans to spend ₦13 billion on CAPEX in 2017 through a mix of debt and internally generated funds, with 85% going into acquisition of Plant & Equipment.
We see this as an important move in improving the growth prospect of the company given that its refinery is currently operating at near maximum capacity; management guides on 100% capacity utilization for FY’17.
More importantly, PRESCO’s CPO production is poised for a boost from FY’18 as more plantations roll into maturity phase, further justifying the need for a larger refining capacity.
After updating our model, we revise our FY’17 PAT to ₦9.5 billion (Previous: ₦6.0 billion). We also revise our target price higher to ₦65.46 (Previous: ₦59.45).