August 13, 2019 /08:04AM / By Investment-One Research /
Header Image Credit: Presco Plc
Q2 2019 result highlight: Lower Prices Weigh on Profit.
Presco published its Q2 2019 results, which showed a lower turnover on the back of weak prices of Crude Palm Oil (CPO) in 2019.
Weaker Prices Drive Down Margin
On a y/y basis, turnover was down by 0.50% to N5.04billion. We believe the decline in revenue may not be unconnected to the decline in CPO prices which have been under pressure due to lingering trade tension between US and China. With a marginal fall in revenue, we suspect higher volume sales could have reduced the impact of the fall in price level on revenue. Similarly, the company’s gross profit margin declined to 74.00% in Q2 2019 from 84.13% in Q2 2018 on the back of the weak price level.
Higher Operating Cost Excercebates Weak Performance
Moving down to the P& L line, a combination of the jump in OPEX/Sales to 40.40% in Q2 2019 from 36.17% in Q2 2018, a 26.59%y/y decline in Other income and a 46.25%y/y increase in Net Finance cost added to the impact of the weaker gross profit margin. As a result, PBT margin fell to 26.98% in Q2 2019 from 45.12%in Q2 2018 and PBT declined by 40.50%y/y to N1.36billion in Q2 2019.
Performance Remains Uninspiring on a quarter on quarter basis
On a sequential basis, turnover fell by 8.42% q/q due to lower prices in the third quarter of the year with average price of crude palm oil declining by 5.16%q/q in Q2 2019.
In the same vein, gross profit margin declined to 74.00% in Q2 2019 from 85.07% in Q1 2019, which may be due to lower prices. That said, the jump in OPEX/sales to 40.40% in Q2 2019 from 30.00% in Q1 2019 and the fall in gross profit margin offset the impact of a 15.15% q/q fall in net finance cost. As a result, PBT margin fell to 26.98% in Q2 2019 from 45.81% in Q1 2019 and PBT shed 46.06% q/q to N1.36billion.
Poor First Half Performance
In the first half of the year, turnover remained under pressure due to lower Crude Palm oil price. As such, revenue shed 9.52% to N10.55billion in H1 2019. Similarly, gross profit margin declined by 82bpsy/y to 79.78% during the same period. In the same vein, the jumped in OPEX/ Sales by 682bps and a 65.47% rise in net finance cost drove the PBT margin down to 46.01% in H1 2019 from 49.05% in H1 2018. Similarly, PBT fell by 32.10% y/y to N3.88billion in H1 2019.
Summary and Outlook
In conclusion, the results were headlined by lower pricing, which weighed on margins and earnings.
Going forward, we expect the company to continue to benefit from the government’s exclusion of importers of crude palm oil from the official foreign exchange market, which has been a barrier to importation of crude palm oil thus preserving the market for local big players like Okomu and Presco. In the same vein, we expect the company’s 15,000 hectares expansion project to continue to support its top line growth within the medium to long term. The company did plantation on 4,000hectares in 2018 and intends to do plantation on another 4,000 hectares in 2019. In the same vein, the expected improvement in consumer spending in H2 2019, could improve demand for crude palm oil particular for the production of other consumer goods.
Nonetheless, the current decline in price of crude palm oil may continue to weigh on gross profit margin and turnover growth in the near term. Similarly, the volatility in revaluation gain on biological assets is a concern considering the impact it could have on the company’s PBT performance.
Sources: Company financials, Investment One Research