Vetiva wants investors to ‘hold’ Presco stock

by | May 17, 2018 12:05 am

Equity research analysts at Lagos-based Vetiva Capital Plc have revised higher their target price (TP) for Presco Plc to N80.08 from previous target price of N75.76.

Also, the Tominiyi Ramon-led team of analysts wants investors to hold the stock of Presco Plc.

PRESCO is the only fully integrated player in the Nigerian oil palm industry, specialised in the cultivation of oil palms and in the extraction, refining and fractioning of crude palm oil (CPO) into refined products.

The Siat Group currently own 60percent of the company with the remaining 40 percent held by Nigerian institutions and individuals. Presco share is currently priced at N75.60 with N75.60billion market capitalisation. 

Vetiva research analysts’ commentary

Earnings beat despite year-on-year (y/y) declines across profit lines

PRESCO recently released first-quarter (Q1) 2018 results reporting y/y declines across major profit lines. Notably, PAT over the 3-month period was down 33percent y/y to N2.6 billion. The earnings decline was largely on the back of an 8 percent  y/y drop in revenue (N6.6 billion) amidst higher operating costs over the period. We highlight that Q1’17 Revenue was a high base due to significantly lower Crude Palm Oil (CPO) prices and in fact the strongest quarterly Revenue ever recorded by PRESCO. Further dragging earnings lower was a moderation in Gains on Revaluation of Biological Assets from N634 million in Q1’17 to just N96,000 in Q1’18. We however note that excluding this volatile line item, earnings would still have moderated by c.24percent 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 6percent, 22percent and 32percent respectively.

Margins holding up despite weaker CPO prices

Gross margin for the Q1’18 period moderated to 78percent vs. Q1’17: 80percent and Q4’17: 82percent. We believe this must have been largely driven by softer local Crude Palm Oil (CPO) prices as well as and lower prices of derivative products (Stearin, Olein and so on) particularly since second-half (H2) 2017.

We highlight that the magnitude of the margin moderation was less steep than we had expected (Vetiva Q1 gross margin forecast: 73percent). We had earlier maintained that PRESCO’s products will command some pricing premium given the quality associated with its brand name, and that a majority of its customer profile are large refined oil palm users who are less sensitive to price changes compared to the mainstream retailer. We believe this must have supported margins in the last quarter.

Although we expect this support to persist, we anticipate further margin contraction in subsequent quarters as the outlook on local CPO prices continues to spell further downtrend. Particularly, improving Nigeria’s FX inflows is expected to drive import higher (including oil palm products) and mount pressure on prices. The near-term outlook on global CPO prices is also relatively weak and presents further downside to local CPO prices. That said, we revise our forecast FY’18 Gross margin to 74percent, lower than Q1’18 level but higher than our previous estimate of 71percent.

Valuation revised higher amidst Q1 outperformance

Despite outperforming our estimate, we retain our FY’18 Revenue at N22.3 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 N11.1 billion (Previous: N10.1 billion). Meanwhile, PRESCO secured a 20percent N4.5 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 N1.3 billion (Previous: N0.6 billion). Overall, our FY’18 PAT is revised to N7.0 billion (Previous: N6.7 billion).

Iheanyi Nwachukwu