Thursday, June 20, 2019 /11:40AM / By FBNQuest Research / Header Image Credit: Presco Plc
27% cut to our EPS forecasts over the 2019-20E period
Presco’s Q1 2019 and Q4 2018 results both disappointed. Compared with our estimate, Q1 2019 earnings of N2.1bn, which declined by -18% y/y, missed by around 25%. Following the firm’s earnings conference call, we conclude that topline pressure is very likely to persist through the year. Management guides to flattish unit volume sales y/y but a moderate compression on pricing due to increased competition from crude palm oil (CPO) imports. Given that the bulk of palm oil imports are of lower quality, management remains quite confident of retaining its blue chip customer base. CPO accounted for around 42% of Presco’s sales in Q1 2019 and Q4 2018. Competition is less fierce for other palm oil by-products such as RBDO, stearin and olein.
Given the importance of CPO to Presco’s profits, we have cut our earnings forecasts by around –27% over the 2019-2021E period to reflect our weaker outlook for the company. Our new price target of N48.6 is down by a similar magnitude. The federal government has continued to show support to local producers of palm oi. Reports this week of a presidential directive to blacklist firms involved in smuggling and dumping of palm oil in the country is good news for Presco. The directive provides an upside risk to our forecasts - if implemented properly.
From current levels, our price target implies a potential downside of -2.8%; as such, we retain our Neutral rating on the stock. Year-to-date, Presco shares have shed -22%, underperforming the NSE ASI’s performance by -17%. On a relative basis, Presco shares are trading on a 2019E P/E of 9.6x for an EPS decline of -27% in 2020.
Earnings disappointed in both Q4 2018 and Q1 2019
Presco’s delayed results disappointed in both Q4 2018 and Q1 2019. During the conference call, management blamed the delay on the adoption of revised accounting standards for valuing biological assets. The new rule considerably lowers P&L volatility as it reduces the impact that biological assets would have on profits going forward.
Nonetheless, in Q4, while sales declined -6% y/y to N5.1bn, the firm posted a loss before tax of –N1.2bn, driven by a significant loss on the biological asset revaluation line of –N3.0bn. This negative result offset y/y improvements in production and operating costs.
In Q1 2019, while sales of N5.5bn fell by -17% y/y, PBT and PAT of N2.6bn and N2.1bn declined by around -25% y/y and -18% y/y respectively. Presco proposed a dividend of N2.00 (vs. our N0.90 estimate) which implies a yield of 4%.