Culled—Proshare
December 21, 2016/FBNQuest Research
Strong topline growth impact on earnings
Although Q3 2016 sales missed our forecast by 5.2%, Presco has continued to enjoy strong double digit sales growth in recent quarters. Aside increased demand for its product locally, the company is also benefiting from increased pricing power as competitors struggle to obtain foreign exchange (fx) for imports.
Prices have increased by above 50% y/y on average across its product categories. Although the company recorded a N200m fx loss during the quarter, which we believe relates to expenditure on capital projects, its export of crude palm kernel oil provided a cushion.
The CBN has remained unwavering in its policy restriction on access to fx for CPO imports. As such, we believe the company is on track to post another set of decent results in Q4. We have therefore increased our 2016-17E EPS estimates by 18.5% on average.
Our new price target of N48.5 is 10.3% higher, implying a 15.6% potential upside from current levels. On a relative valuation basis, Presco shares are trading on a 2016E P/E multiple of 9.4x for a 4.1% EPS growth in 2017E.
The shares have gained 27.3% year-to-date, outperforming the NSEASI by 34.6%. We expect sales and adjusted EPS to grow by 43% y/y and 156% y/y in full year 2016. Our Neutral rating on the stock is unchanged.
Q3 2016 results recap
Presco’s Q3 2016 results showed sales growth of 31.6% y/y to N4.4bn. Likewise, PBT and PAT grew by 75.9% y/y and 68.8% y/y to N5.6bn and N3.8bn respectively. While the top line growth was due to sales price increases, the impressive earnings were mainly due to a gross margin expansion of 2,549bps y/y to 95.7% and a 75.7% y/y rise in biological asset revaluation gains.
The combination of both factors offset the impact of an 87.8% y/y increase in opex (due to reclassifications between cost of sales and administrative expenses) as well as a N200m fx loss.
The lower PAT growth compared with PBT was as a result of a 93.0% y/y rise in income tax expense to N1.8bn during the quarter. On a q/q basis, sales were up 1.9% q/q while PBT and PAT advanced by 139.9% q/q and 134.8% q/q respectively due to similar factors as the y/y trends.
However, the underlying Q3 results (ex-biological asset revaluation gains) show that PBT of N1.8bn (vs. our N1.4bn forecast) declined by -42.1% y/y and -21.1% q/q.
On the other hand, PAT of N37m fell by -98.3% y/y and -97.7% q/q. The 9M results show a 48.4% y/y increase in sales to N11.9bn, while both PBT and PAT grew by 105.2% y/y and 98.0% y/y to N9.7bn and N6.8bn respectively.
