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Initial View - Presco Plc Q3 2018 - Gains on biological asset flatter earnings

• Presco released its Q3 18 result late yesterday, wherein it reported 11.7% YoY growth in profit after tax of N4.58 billion (vs N195.6 million loss after tax in the prior year). The impressive Q3 18 performance trimmed plunge in earnings reported over 6M 18 (-21.6% YoY) as cumulative earnings over the nine months period only declined by a tamer 1.5% YoY to N5.28 billion translating to an EPS of N5.28 (vs N5.36 in 9M 17).
• Revenue Stronger volumes boost revenue: In the review quarter, revenue grew 11.7% YoY to N4.58 billion on the back of higher volumes in the period. According to FEWSNET, local refined Crude palm oil (CPO) prices were down ~20% YoY in Q3 18 following plunge in global CPO prices hence, the revenue growth largely reflects stronger volumes in the period. This is in line with higher volumes reported by Nestle over Q3 18, which is a large off taker of Presco’s refined CPO. This in addition to a 33.6% YoY slump in Cost of sales to N1.2 billion led to gross profit growth of 47.6% YoY to N3.38 billion, translating to gross margin expansion to 73.8% from 55.8% in the prior year.
• Higher OPEX trim operating profit: Despite expansion in gross profit, Presco’s operating profit for the quarter contacted 19.1% YoY to N1.71 billion in Q3 18. This mirrors higher operating expenses (Q3 18: N1.78 billion vs N358.7 million in Q3 17) in the period following higher Administrative expenses in the period which jumped six-fold to N1.71 billion.
• Gain on biological asset flatter earnings: However, as against loss on biological asset reported last year (N1.39 billion), Presco reported a N369.6 billion gain on biological asset. Overall, the combination of higher revenues, lower cost of sales and gain on biological asset reported in the period translated to a Profit after tax of N1.29 billion vs a loss after tax of N195.6 million in Q3 17 and an EPS of N1.29. However, after stripping out the volatile biological gains from Presco’s earnings, Profit before tax would have declined 22.1% YoY to N1.38 million over Q3 18.
• Presco currently trades at a P/E of 8.63x which is at a Premium to 7.62x for Okomu, but discount to 13.5x for MENA peers. We have FVE of N67.47 which represent a 27% upside, hence our  BUY rating on the stock.
• More analysis to follow.