Culled—-Proshare

September 6, 2018/FBNQuest Research

-11% cut to EPS forecasts over the 2018-19E period:

Presco’s Q2 2018 earnings declined -16% y/y to N1.4bn and missed our estimate by around 14%. The primary drivers were a sales decline of around -10% y/y and a higher-than-expected effective tax rate of 39%. Relatively lower pricing weighed on sales as average prices fell by -23% y/y to N411,576 per tonne as at June 2018. Following our discussions with management, we expect continued downward pressure on prices due to rising palm oil imports.

This is broadly in line with the view expressed by competitor Okomu Oil’s (Okomu) management on its Q2 2018 conference call. The weaker pricing outlook overrides our view of a healthier EBITDA margin over the next three years (mainly due to a moderation of operating costs). Similar to our view on Okomu, we expect H2 to be a more difficult period. We forecast an EPS decline of around -77% y/y to N6.15 in 2018. India’s crude palm oil (CPO) import duty tariff hike (the highest in more than a decade) put in place in Q1 2018 continues to weigh on global CPO prices (down c.-19% over the last 12 months). 

Therefore, we have cut our EPS forecasts over the 2018-19E period by –11%. Our new price target of N71.0 has been cut by -17% despite rolling forward our valuation to 2019. Our price target implies an upside potential of 18%. Year-to-date, Presco shares have shed -12.3%, broadly in line with the NSE ASI’s performance. As such, we retain our Neutral rating on the stock. On a relative basis, Presco shares are trading on a 2018E P/E of 12.3x for 4% EPS growth over the 2019-20E period. These compare with the 7.8x 2018E P/E multiple that rival Okomu Oil is trading on.

All key line items showed y/y and q/q declines in Q2:

In Q2, all key line items declined both on a y/y and q/q basis. The topline decline of -10% y/y to N5.1bn was driven by weaker product pricing due to increasing palm oil imports and offset a gross margin expansion of +459bps y/y to 74.6% and a -21% y/y decline in operating expenses to N1.4bn.

Additionally, Presco reported an effective tax rate of 39.1% in Q2 vs. 35% in the corresponding quarter of 2017. Sequentially, sales fell by -23% q/q while PBT and PAT declined by -33% q/q and -46% q/q respectively. Compared with our estimates, while sales missed by 25%, PBT was in line with our N2.3bn forecast. However, PAT came in -14% behind our forecast because Presco’s Q2 effective tax rate of 39.1% came in well ahead of the 30.0% we were modelling.