ARM Research

Full-year 2017 result of Presco Plc. (Presco) revealed improvement in core operating performance on the back of strong growth in sales (+42.3% YoY to N22.4 billion) and improved margins (+146bps YoY to 73.4%). However, lower gains on biological assets (N2.8 billion versus N24.9 billion in FY 16) reported during the period, drove a 65% YoY decline in before-tax earnings (PBT). For context, excluding the volatile gains on biological assets, PBT would have expanded 28.6% YoY to N8.2 billion. Irrespective, income tax credit worth N14.5 billion provided support for earnings, with PAT printing at N25.4 billion (+16.9% YoY). The board of directors declared a dividend per share of N2.00 (FY 16: N1.50) which translates to a dividend yield of 2.8% based on current market price.

Over Q4 17, which is seasonally its peak period, Presco reported revenue growth of 44% to N5.4 billion underpinned by higher volumes even as pricing of refined crude palm oil declined 28% YoY over the quarter. With cost of sales growth (-32% YoY to N992 million) tracking behind revenue, gross profit rose 91.8% YoY to N4.4 billion with a 20.4ppts expansion in related margin to 81.8% over the review quarter.

Despite the sturdy gross profit, Presco’s EBIT for the quarter came in at a loss of N221 million (vs. N369 million profit in Q4 16) following a 2.1x increase in operating expenses on account of management fees worth N2.3 billion paid to its parent company. According to details provided in the financial statements, the company recently received an approval from the board of
NOTAP—National Office of Technology Acquisition and Promotion (NOTAP)—to make the payment which includes fees for the current year as well as a two-year backlog. Excluding the management fees, Presco would have reported a positive EBIT of N2.1 billion.

Irrespective of the operating loss, the combination of gains on biological assets (N3.1 billion), net finance income (N159 million) and income tax credit (N17 billion) provided support for Q4 17 PAT which rose 34.2% YoY to N20 billion.

Based on adjusted earnings, Presco trades at a P/E of 8.8x versus 6.5x for main peer Okomu. We have a NEUTRAL rating on the stock based on our last communicated FVE of N80.39.

More analysis to follow.

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