Initial View: Presco Plc. FY 17 - Surprise increase in OPEX offset Q4 revenue growth
- Full-year 2017 result of Presco Plc. (Presco) revealed improvement in core operating performance on the back of strong growth in sales (+42.3% YoY to N4 billion) and improved margins (+146bps YoY to 73.4%). However, lower gains on biological assets (N2.8 billion versus N24.9 billion in FY 16) reported during the period, drove a 65% YoY decline in before-tax earnings (PBT). For context, excluding the volatile gains on biological assets, PBT would have expanded 28.6% YoY to N8.2 billion. Irrespective, income tax credit worth N14.5 billion provided support for earnings, with PAT printing at N25.4 billion (+16.9% YoY). The board of directors declared a dividend per share of N2.00 (FY 16: N1.50) which translates to a dividend yield of 2.8% based on current market price.
- Over Q4 17, which is seasonally its peak period, Presco reported revenue growth of 44% to N4 billion underpinned by higher volumes even as pricing of refined crude palm oil declined 28% YoY over the quarter. With cost of sales growth (-32% YoY to N992 million) tracking behind revenue, gross profit rose 91.8% YoY to N4.4 billion with a 20.4ppts expansion in related margin to 81.8% over the review quarter.
- Despite the sturdy gross profit, Presco’s EBIT for the quarter came in at a loss of N221 million (vs. N369 million profit in Q4 16) following a 2.1x increase in operating expenses on account of management fees worth N3 billion paid to its parent company. According to details provided in the financial statements, the company recently received an approval from the board of NOTAP—National Office of Technology Acquisition and Promotion (NOTAP)—to make the payment which includes fees for the current year as well as a two-year backlog. Excluding the management fees, Presco would have reported a positive EBIT of N2.1 billion.
- Irrespective of the operating loss, the combination of gains on biological assets (N1 billion), net finance income (N159 million) and income tax credit (N17 billion) provided support for Q4 17 PAT which rose 34.2% YoY to N20 billion.
- Based on adjusted earnings, Presco trades at a P/E of 8.8x versus 6.5x for main peer Okomu. We have a NEUTRAL rating on the stock based on our last communicated FVE of N39.
- More analysis to follow.
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ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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