November 12, 2018/InvestmentOne report 

·         Volatile top line: down 9.66% q/q, up 11.70% y/y.

·         Mixed Gross Profit Margin: down 87bps q/q, up 1792bps y/y.

·         Rising opex/sales ratio: up 1219bps q/q; 3010bps y/y.

·         Unstable PBT performance: down 23.30% q/q; up 20.67 % y/y.

Last week, Presco published its Q3 2018 results, which showed a higher turnover on the back of higher volume. Moreover, the ban on crude palm oil importers from the official FX market could have maintained the supply deficit in the market thus output sales. 

Gross Profit Margin Improves Despite Fall in Prices 

On a y/y basis, turnover was up by 11.70% to N4.57billion. We believe the rise in revenue could be as a result of improvement in sales volume despite the 13% fall in crude palm oil the international market. Moreover, we believe the CBN’s ban on crude palm importers from official FX market could have helped to preserve the supply deficit in the market.  

On the other hand, the company’s gross profit margin improved from 55.84% in Q3 2017 to 73.76% in Q3 2018. This may be the result of better cost management by the firm, which could have outweighed the effect of the fall in prices of Crude Palm Oil. 

Stronger Gross Profit Margin and Lower Finance Cost Support PBT 

Moving down to the P& L line, despite the jump in OPEX/Sales to 38.86% in Q3 2018 from 35.50% in Q3 2017 and 38.66% y/y decline in Other income, a combination of 15.00% y/y decline in net finance cost and jump in gross profit margin drove the PBT margin up by 285bps y/y to 38.31% in Q3 2018. As a result the company recorded a 20.67% y/y increase in PBT to N1.75billion in Q3 2018. 

Lower Pricing and Seasonally Low Volume Weigh on Earnings

On a sequential basis, turnover fell by 9.66% q/q due to lower prices in the third quarter of the year with average price of crude palm oil declining by 10%q/q in Q3 2018. Similarly, volumes are usually low in third quarter with the output always reaching the peak in second quarter of the year.  

In the same vein, gross profit margin declined 87bps q/q to 73.76% in Q3 2018, which may be due to lower prices. That said, the jump in OPEX/sales to 38.86% in Q3 2018 from 26.66% in Q2 2018, a 3.96% q/q rise in net finance cost to N325.54million and a lower gross profit margin brought the company’s PBT margin down by 681bps q/q to 38.31% in Q3 2018. As a result, the company’s PBT declined by 23.30% q/q to N1.75billion in Q3 2018. 

Weak Pricing Weighs on 9M 2018 Performance 

In 9M 2018, turnover declined by 4.07% y/y due to lower pricing of crude palm oil in the global market. However, gross profit margin improved by 495bpsy/y to 75.71% in 9M 2018 which may be due to better cost management by the company.  

That said, the rise in OPEX/sales to 28.22% in 9M 2018 from 16.95% 9M 2017 offset the impact of the combination of 27.28% y/y improvement in other income to N319.63million, 18.05% y/y decline in net interest expense to 928.54 million and the stronger gross profit margin. As a result, PBT margin fell 94bps y/y and PBT declined by 5.99% y/y to N7.47billion. 

Summary and Outlook

In conclusion, the results were headlined by improvement in turnover despite lower pricing, while better gross profit margin offset the impact of jump in OPEX/Sales. 

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.  

Similarly, the expected improvement in consumer spending in Q4 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 Q4 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.