August 1, 2018/InvestmentOne Research
NIGERIA | EQUITIES | AGRICULTURE | PRESCO PLC.
Q2 2018 result highlight: Lower Pricing Weighs on PBT Performance.
· Lower top line: down 24.62% q/q, 12.13% y/y.
· Mixed Gross Profit Margin: down 376bps q/q, up 406bps y/y.
· Rising Opex/sales ratio: up 519bps q/q; 135bps y/y.
· Mixed PBT performance: down 36.27% q/q; up 4.35 % y/y.
Earlier this week, Presco published its Q2 2018 results, which showed a lower turnover despite ban on access to dollars via the official FX windows for crude palm oil importers.
Lower Pricing Weighs on Gross Profit Margin
On a y/y basis, turnover was down by 12.13% to N4.97billion. We believe the drop in sales could be as a result of the 5.03%y/y fall in prices of crude palm oil in international market. In addition, we opine that an increase in crude palm oil imports, due to availability of FX in the black market while the ban remains at the official FX market, could have affected sales of Presco in Q2 2018. However, the company recorded a 406bps y/y improvement in gross profit margin to 74.12% in Q2 2018, which may be due to better cost management by the company.
Gains From Other Income Offset The Impact Of Lower Gross Profit Margin
Moving down to the P& L line, despite a 135bps y/y increase in OPEX/Sales and lower gross profit margin, a combination of 28.06% decline in net finance cost and jump in Other operating income to N168million (vs N31million in Q2 2017) drove the PBT margin up by 695bps y/y to 44.02% in Q2 2018.
As a result the company recorded a 4.35% y/y increase in PBT to N2.19billion in Q2 2018.
Lower Pricing Offset the impact of higher Seasonal Volume
On a sequential basis, turnover fell by 24.62% q/q due to lower prices in the second quarter of 2018 with average price of crude palm oil declining by 4.87%q/q in Q2 2018.
We believe this could have offset the impact of higher volume usually experienced in second quarter of the year. In the same vein, gross profit margin declined by 376bps q/q to 74.12% in Q2 2018, which may be due to the lower prices.
That said, a combination of the lower gross profit margin, 519bps q/q rise in OPEX/sales and 8.04% q/q increase in net finance expenses in Q2 2018 offset the jump in Other income to N168million (vs N39million in Q1 2018).
As a result, the company recorded an 805bps q/q decline in PBT margin, which led to a 35.27% q/q fall in PBT in Q2 2018.
Lower Pricing Weighs on H1 2018 Performance
In H1 2018, turnover declined by 9.11% y/y due to lower pricing of crude palm oil in the global market. However, gross profit margin was somewhat flat with a marginal improvement of 94bps y/y to 76.47% in H1 2018 which may be due to better cost management by the company.
That said, a combination of 108bps y/y rise in OPEX/sales and 90.82% y/y jump in net finance cost in H1 2018 drove the PBT margin down to 49.05% in H1 2018 from 59.24% in H1 2017.
Overall, the company recorded a 24.74% y/y decline in PBT to N5.72billion in H1 2018.
Summary And Outlook
In conclusion, the results were headlined by lower turnover due to lower pricing, which led to a decrease in gross profit margin despite higher other income.
Going forward, we expect the company to continue to benefit from the government’s exclusion of importers of crude palm oil from the official foreign exchange market, which has been a barrier to importation of crude palm oil thus preserving the market for local big players like Okomu and Presco. In the same vein, we expect the company’s 15,000 hectares expansion project to continue to support its top line growth within the medium to long term. The company intends to plant 4000hectares in 2018 and another 4000 hectares in 2019.
In the same vein, the expected improvement in consumer spending in H2 2018, could improve demand for crude palm oil particular for the production of other consumer goods. However, the feedback from consumer names on potential increase in volume in H2 2018 has been mixed.
Nonetheless, the current decline in price of crude palm oil may continue to weigh on gross profit margin and turnover growth in the near term. Similarly, the volatility in revaluation gain on biological assets is a concern considering the impact it could have on the company’s PBT performance.
Presco Plc Q2 2018/ H1 2018 figures. YE: DEC (N’ millions) | |||||
Q2 2018 | Q/Q | Y/Y | H1 2018 | Y/Y | |
Revenue | 4,967.78 | -24.62% | -12.13% | 11,658.00 | -9.11% |
Cost of sales | -1,285.46 | -11.81% | -24.05% | -2,743.00 | -12.62% |
Gross profit | 3,682 | -28.26% | -7.03% | 8,915.00 | -7.97% |
Gross profit margin | 74.12% | -376bps | 406bps | 76.47% | 94bps |
Total Opex | -1,351.28 | -6.85% | -7.54% | -2,802.00 | -7.40% |
Opex/sales | 27.20% | 519bps | 135bps | 24.03% | 43.92% |
Other operating income | 168.82 | 330.88% | 437.15% | 208.00 | 201.45% |
Operating profit (PBIT) | 2,500.00 | -32.82% | -1.22% | 6,321.00 | -7.21% |
Operating profit margin | 50.3% | -614bps | 556bps | 54.22% | 111bps |
Net interest expense | -313.15 | 8.04% | -28.06% | -603.00 | 90.82% |
PBT | 2,186.71 | -36.27% | 4.35% | 5,718.00 | -24.74% |
PBT margin | 44.02% | -805bps | 695bps | 49.05% | -1,019bps |
Income tax expense/income | -893.82 | 7.02% | -1.93% | -1,729.00 | -15.37% |
Tax rate | -40.9% | -1,653bps | 262bps | -30.24% | -335bps |
PAT | 1,292.89 | -50.20% | 9.19% | 3,989.00 | -28.19% |
PAT margin | 26.03% | -1,337bps | 508bps | 34.22% | -909bps |
Source: Company financials, Investment One Research
