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Initial View - Presco Q420 - Operating success makes up for weak topline

Operating success makes up for weak topline

• Presco’s Q420 results showed that revenue growth slowed to 10%YoY while cost of sales more than doubled over the same period. This combination meant that gross profit fell 33%YoY, its steepest decline since 2017, with gross margin also declining to its lowest level since 2014. Away from the topline, Presco cut its operating expenses by 47%YoY which helped lead EBIT higher by 10%YoY to N2.68 billion. PBT printed at N2.37 billion while PAT came in at N2.0 billion, both of which are improvements from a year ago. For FY20, both gross profit (+11%) and EBIT (+29%) rose but the margin for the former was lower at 59% vs (65% in FY19) while there was an improvement in the later to 44% (vs 41% in FY19). PBT was 48% higher in FY20 at N8.95 billion.
• Cost of sales doubles as revenue growth slows: Presco’s YoY revenue growth slowed for the third consecutive quarter to 10.3% bringing revenue for the period to N4.99 billion (Q419: N4.53 billion). Costs, meanwhile, rose by 136%YoY to N2.75 billion leading to a lower gross profit of N2.24 billion (Q419: N3.36 billion); this is the lowest quarterly gross profit Presco has reported since 2016. Subsequently, gross profit margin came in lower at 45% (Q419: 74%) which highlights the cost pressures they are currently facing. Over FY20, Presco recorded a 21.2% increase in its revenue to N23.91 billion which marked the first annual revenue growth since 2017. On the other hand, cost of sales rose at a faster rate of 39% (vs 28% in FY19) to N9.75 billion. Despite this faster rise in costs, Presco recorded a higher gross profit for FY20 of N14.16 billion (FY19: N12.72 billion) but a lower margin of 59% (vs 65% in FY19).
• Presco were able to cut their operating expenses (‘OPEX’) by 46.5%YoY over Q420 to N1.58 billion. This improvement came on the back of a 48.6%YoY cut in admin expenses; sales & distribution costs were up by 63.3%YoY. This, coupled with a 12%YoY increase in the gain on biological assets to N2.05 billion, led to a 9.5%YoY improvement in EBIT to N2.68 billion (Q419: N2.45 billion). Over FY20, OPEX fell 25% to N5.11 billion and the gain in biological assets was higher by 12% leading EBIT 29% higher to N10.5 billion.
• Despite no finance income being reported in 2020 (vs N67 million in 2019) Presco still managed to reduce their net finance expense by 26% over FY20 to N1.54 billion as finance expense was cut by 28%. FY20 PBT printed at N8.95 billion, a 48% increase from 2019’s N6.06 billion while PAT was up 83% to N7.03 billion (FY19: N3.84 billion). This translates to an EPS of N7.03 which marks a sharp improvement from 2019’s N3.84. For the quarter, Q420, PBT was up 39%YoY to N2.37 billion while PAT was up over 200% to N2.0 billion.
• The balance sheet shows that Presco’s total borrowings has remained almost stable QoQ (N13.25 billion at Q420 vs N13.81 billion at Q320) but diving into the numbers we notice a slight pivot in the composition of that debt. Short-term borrowings now account for 40% of total borrowings compared to 25% in the previous quarter. In absolute terms, that is an increase of 53%QoQ to N5.31 billion (Q319: N3.46 billion). Even within short term borrowings there has been a rebalancing of sort as Presco has reduced the amount of overdrafts (-14%QoQ to N8.04 billion) while increasing the amount of short term loans (+54% to N5.31 billion). On the other hand, long term borrowings, which now account for 60% of total borrowings, fell 23%QoQ to N7.94 billion. We assume the decision to focus more on short term borrowings may be a ploy to benefit from low rates while the future direction of rates remains unclear.
• This stock remains under review while we wait for the audited results and for more clarity around their numbers