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Presco Q4 2016 Results - Operating Expenses Up by 48% YoY

Stock & Analyst Updates	3251 VIEWS
Stock & Analyst Updates
3251 VIEWS

Tuesday, April 18, 2017/2:27 PM/FBNQuest Research

Event: Presco reports Q4 2016 results
Implications: Neutral to slightly positive market reaction expected
Positives: Q4 2016 sales up 57%
Negatives: Operating expenses up 48% y/y; gross margin contraction of -1,873bps y/y to 61.4%

Presco reported its Q4 2016 results this morning showing sales growth of 57.2% y/y to N3.8bn. PBT and PAT of N21.5bn and N14.9bn compare with pre-tax and post-tax losses of –N610m and –N1.2bn respectively recorded in Q4 2015.

The strong earnings were driven by biological assets revaluation gain of N20.5bn recorded in Q4 2016. Excluding the biological assets revaluation gain, PBT would be around N1.0bn. Although sales growth was strong, a gross margin contraction of -1,873bps y/y to 61.4% and opex growth of 48.2% y/y weighed on earnings.

To a lesser extent, net finance growth of 107% y/y also contributed. Sequentially, sales were down -14.5% q/q (Q4 is usually one of the weaker quarters for palm oil companies due to seasonality) while PBT and PAT advanced by around 290% q/q on average.

Similar to the y/y trend, gross margin contracted by -466bps q/q while opex and net finance costs advanced by 177% q/q and 119% q/q respectively and weighed on the bottom line.

On a full year basis, sales of N15.7bn were up 50.4% y/y. PBT and PAT of N31.2bn and N21.7bn were up by 641% y/y and 772% y/y respectively. In addition to the strong sales growth, gross margin expanded by 847bps y/y to 72.0%. A 46.6% y/y opex growth weighed on earnings.

Compared with our estimates, Q4 sales were ahead by 26% while PBT was in line (excluding biological asset revaluation gains).

Presco has declared a dividend of N1.50 compared with consensus estimate of N1.45. The DPS implies a yield of 3%. The stock has gained +17.2% this year and has underperformed the broad index which has shed -5.1% ytd. At current levels, Presco trades on a 2017 P/E multiple of 8.1x for EPS growth of 14.8% in 2018E.

We expect the market reaction to be neutral to slightly positive given that the full year underlying performance was slightly ahead (by 7%) of consensus estimates.

We rate the stock Neutral. Our estimates are under review.

Presco Q4 2016 results: actual vs. FBNQuest Research estimates (N millions)

			Q4 2016				FY 2016
	Actual	*Y/y*		Q/q	FBNQuest est.	Actual vs FBNQuest est. (%)	Actual	*Y/y*	FBNQuest est.	Actual vs FBNQuest est. (%)
Sales	3,779	57.2%		-14.5%	3,008	25.6%	15,716	50.4%	14,945	5.2%
Cost of sales	-1,459	205.3%		-2.8%	-716	103.9%	-4,405	15.5%	-3,662	20.3%
Gross profit	2,320	20.4%		-20.5%	2,292	1.2%	11,311	70.5%	11,284	0.2%
-gross margin	61.4%	-1873bps		-466ps	76.2%	-1481bps	72.0%	847bps	75.5%	-353bps
Operating expenses	-2,195	48.2%		177.0%	-1,329	65.2%	-4,603	46.6%	-3,736	23.2%
Gain/Loss on bio. asst. revaluatn.	20,471	n/a		445.8%	0	n/a	24,879	2242.2%	4,409	464.3%
Other operating income	245	1.6%		709.1%	286	-14.5%	323	-11.4%	365	-11.4%
Operating profit	20,840	n/a		252.8%	1,249	1568.1%	31,911	548.3%	12,320	159.0%
Int. and similar chgs	-262	107.4%		119.2%	-151	73.8%	-685	-3.3%	-573	19.4%
Exchange gains (loss)	934	n/a		n/a	0	n/a	0	n/a	-934	n/a
PBT	21,512	n/a		285.0%	1,099	1858.0%	31,226	640.9%	10,813	188.8%
-PBT margin	569.3%	59466bps		44284bps	36.5%	53276bps	198.7%	15835bps	72.4%	12634bps
Tax	-6,577	1008.8%		265.3%	-330	1895.4%	-9,491	451.4%	-3,244	192.6%
Tax rate	30.6%	12785bps		-164bps	30.0%	57bps	30.4%	-1044bps	30.0%	39bps
PAT	14,935	n/a		294.3%	769	1842.0%	21,735	771.7%	7,569	187.2%
-PAT margin	395.2%	44529bps		30953bps	25.6%	36968bps	138.3%	11443bps	50.6%	8765bps
Other comp. Income	29	-67.2%		n/a	0	n/a	29	82.7%	0	n/a
PAT after comp. Income	14,964	n/a		295.1%	769	1845.8%	21,764	767.3%	7,569	187.5%