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PRESCO PLC Q1'18 - Earnings moderate from high 2017 base

Earnings moderate from high 2017 base                                                                              

PRESCO recently released Q1’18 results, reporting y/y declines across major profit lines. Notably, PAT over the 3-month period was down 33% y/y to ₦2.6 billion. The earnings decline was largely on the back of an 8% y/y drop in Revenue (₦6.6 billion) amidst higher operating costs over the period. We highlight that Q1’17 Revenue was a high base due to significantly higher Crude Palm Oil (from 2016 through early 2017), and in fact is the strongest quarterly Revenue ever recorded by PRESCO. Further dragging earnings lower was a moderation in Gains on Revaluation of Biological Assets from ₦634 million in Q1’17 to just ₦96,000 in Q1’18. We however note that excluding this volatile line item, earnings would still have moderated by c.24% y/y. Notwithstanding, we find the results quite impressive given than we had earlier anticipated a much sharper drop in earnings - Revenue, EBIT and PAT beat our estimates by 6%, 22% and 32% respectively.                                                                          

Despite outperforming our estimate, we retain our FY’18 Revenue at ₦22.3 billion due to our less optimistic outlook on local CPO prices. Based on our revised gross margin estimate and relatively unchanged assumptions on operating costs estimate, we revise our FY’18 PAT to ₦11.1 billion (Previous: ₦10.1 billion). Meanwhile, PRESCO secured a 20% ₦4.5 billion 4-year bank loan within the quarter, which we believe will be used to partly fund the company’s ongoing expansion projects. As such, we revise our FY’18 interest expense to ₦1.3 billion (Previous: ₦0.6 billion). Overall, our FY’18 PAT is revised to ₦7.0 billion (Previous: ₦6.7 billion), and our target price revised higher to ₦80.08 (Previous: ₦75.76).