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PRESCO PLC FY'17 - Eyeing volume growth to keep earnings resilient

Eyeing volume growth to keep earnings resilient                                                                           

PRESCO recently released its FY’17 results showing mixed performance across major line items. In line with expectations, top line maintained the double-digit growth rate, up 42% y/y to ₦22.4 billion and slightly ahead of our ₦21.2 billion estimate. Despite trending lower over the course of the year, strong CPO prices remained the key driver of the top line growth even as volume growth remained flat; PRESCO harvested 169k MT of Fresh Fruit Bunch (FFB) in FY’17 vs 171k MT in FY’16. With the strong revenue performance amidst a modest 15% y/y rise production cost, FY’17 gross profit rose 45% y/y to ₦16.4 billion, beating our ₦14.1 billion estimate. Selling & Distribution expense was however a pressure point for earnings, up 16% y/y to ₦6.7 billion (9M’17: ₦2.6 billion) and significantly higher than our ₦3.2 billion estimate.                                                                    

PRESCO’s major customers are large refined oil palm users who we believe are less sensitive to price compared to the mainstream retail market. Nonetheless, we hold on to our stance that price will offer less support to topline in FY’18 and in the near term. Instead, we expect volume growth to be most impactful as some post-2013 plantings begin to roll into maturity phase. Excluding possible gains/losses of revaluation of biological assets, we revise our FY’18 PAT to ₦6.7 billion (Previous: ₦7.6 billion) and cut post-FY’18 PAT forecasts by 7% after increasing our provision for managements fees to parent company. Our target price is however little changed at ₦75.76 (Previous: ₦76.90), supported by lower risk-free rate assumption.