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PRESCO PLC H1'20 - Anticipating a strong end to FY’20

Presco released its H1’20 results recently, reporting an impressive 71% y/y jump in PAT to ₦4.4 billion in H1’20, significantly ahead of our ₦2.5 billion expectation. The earnings beat was driven by a stronger topline and effective cost containment in the recently concluded quarter. Revenue surged 63% y/y to ₦8.1 billion in Q2’20, taking H1’20 Revenue 29% higher y/y to ₦13.5 billion (Vetiva: ₦12.1 billion). As expected, Q2 topline benefitted from a surge in domestic CPO prices, brought on by the FG’s drastic decision to shut down land borders in Q3’19, limiting the supply of illegally smuggled CPO into the Nigerian market. We also believe that Presco’s CPO sales increased over the period, with demand for food and hygiene products (largely oil palm based) rising during the lockdown and demand shifting towards domestic producers while imported volumes declined. Boosted by significant investments in production and processing capacity, Presco was in a decent position to take advantage of the stronger demand in the period. Notably, the CPO producer had completed construction of a new 350 tons/day palm kernel crushing plant as well as a 30 tons/day shell boiler in 2019. Furthermore, the palm oil mill was expanded to a capacity of 90 fresh fruit bunches (FFB)/hour from 60 FFB/hour in January while a new 500 tons/day vegetable oil refinery was slated to be completed in Q2’20. Amid a strong focus on hygiene and with macroeconomic woes unlikely to slow down demand for food and other CPO based products, we forecast a 41% y/y growth in FY’20 Revenue to ₦27.8 billion.

Following Presco’s impressive first half performance, we have adjusted a number of our cost estimates to match the second quarter run rate. Thus, we arrive at a 71% y/y growth in FY’20 EBIT to ₦13.9 billion. After accounting for interest expense and tax, we arrive at a 230% y/y jump in FY’20 PAT to ₦8.8 billion, a record bottom line for the CPO producer. Adjusting for the expected improvement in performance over the forecast period, lower interest rate environment as well as Presco’s reduced Net debt balance, we now value the stock at ₦59.94 and place a BUY recommendation on the stock.