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Equity Report - Presco Plc Q1 19 - Underlying Pressures persist

• We beam our light on Presco Plc and revise our numbers in the light of the release of its FY 18 and Q1 19 financial result, ongoing trend in the sector and our discussion with management. We cut our FVE by 23% to N51.9 and downgrade to a NEUTRAL rating. This chiefly reflects cut in our FY19E product prices by 22% following expectation of lower product prices this year, underpinned by passthrough of lower global CPO prices and infiltration of imported CPO into Nigeria.
• We remain largely bearish on Presco’s product prices following lower global CPO prices which is reminiscent of persisting glut in the global CPO market and its direct pass through on local prices. This, alongside stability and availability of FX has paved way for infiltration of CPO into Nigeria from Neighboring countries. For context, according to USDA, total CPO imports (238,511MT) into Benin Republic from Malaysia outweighed its total consumption in 2018 (145,000MT). Similarly, over H1 19 alone, Benin Republic’s CPO importation from Malaysia is 82% higher YoY. In our view, we think a large chunk of the excess CPO imports into Benin has been finding its way into Nigeria, thereby intensifying the downslide in local CPO prices.  Based on the foregoing, we slash Presco’s refined CPO prices by 20% in FY 19E.
• On volumes, while 7,706 hectares is staged to mature this year in its Sakponba plantation, we highlight capacity constraint as underpinning for our modest 11% YoY increase in volumes in FY 19E. As a result, following faster decline in prices relative to the increase in volumes, we forecast a 10.3% YoY decline in revenue to N18.9 billion.
• Better cost containment: While we expect pick up in agricultural cost in subsequent quarters as planting season kicked off in May, benefits from better economies of scale due to higher volumes produced this year should keep cost subdued. Thus, we forecast a 15% YoY decline in cost of goods sold to N4 billion (cost to sales: -60bps YoY to 21.7%). Contrarily, due to ongoing construction works at the company, we left our Opex to sales ratio unchanged (31.6%) from last year. Although our expectation for revenue and lower cost to sales translates to FY 19E EBIT margin expansion of 96bps to 49.1%, operating profit (-10.5% YoY to N9.2 billion) remain low in value terms.
• Capex spend spur higher borrowings: To fund its ongoing expansion plan which requires CAPEX spend of N33.4 billion over the next 5 years, Presco resorted to taking on additional debt which prompted a 5% YoY jump in total borrowings to N12.4 billion in Q1 19 (Debt to equity: 47%). Following ramp up in borrowings, we model a 59.5% YoY jump in interest expense to N2 billion. Cumulative impact of our adjustments translates to a softer EPS ex biological loss (-30% YoY to) over FY 19E.
• Following changes to our forecast – chiefly from lower product prices and higher borrowings – we cut FY 19E EPS ex biological loss by 30% YoY to N4.84. Presco trades at a forward P/E of 9.26x relative to 8.26x for Okomu and Bloomberg Middle East and Africa (MENA) peers of 8.33x. On our revised of N51.9, we downgrade to a NEUTRAL rating.
• Catalyst: Significant rise in global CPO prices, sizeable depreciation in parallel market USDNGN and tighter border controls by the FG.