November 7, 2019/InvestmentOne Report

§  Mixed top line: down 3.84% q/q, up 5.91% y/y.

§  Lower Gross Profit Margin: down 582bps q/q, 558bps y/y.

§  Rising Opex/sales ratio: up 181bps q/q; 335bps y/y.

§  Weak PBT performance: down 33.53% q/q; 48.41% y/y.

Recently, Presco published its Q3 2019 results, which showed a higher turnover on the back of higher volume despite the weak Crude Palm Oil (CPO) prices in 2019.

Weaker Prices Drive Down Margin

On a y/y basis, turnover was up by 5.91% to N4.85billion. We believe the rise in revenue may not be unconnected to higher volume sales on the back of the recent border closure. We highlight that CPO prices remain under pressure due to lingering trade tension between US and China. As a result, the company’s gross profit margin declined by 558bpsy/y to 68.18% in Q3 2019.

Moving down to the P& L line, a combination of the 335bpsy/y rise in OPEX/Sales to 42.22% in Q3 2019, a 40.02%y/y decline in Other income and a 29.42%y/y increase in Net Finance cost added to the impact of the weaker gross profit margin. As a result, PBT margin fell to 18.65% in Q3 2019 from 38.29%in Q3 2018 and PBT fell by 48.41%y/y to N904million in Q3 2019.

Performance Remains Uninspiring on a quarter on quarter basis

On a sequential basis, turnover fell by 3.84% q/q due to seasonality despite 1.75%q/q increase in CPO price.

In the same vein, gross profit margin declined by 582bpsq/q due to input cost pressure. That said, the 582bps q/q jump in OPEX/sales to 42.22% in Q3 2019 and the fall in gross profit margin offset the impact of a 8.03% q/q fall in net finance cost. As a result, PBT margin fell by 833bpsq/q and PBT fell by 33.5% q/q.

Weak 9M Performance

So far in 2019, turnover remained under pressure due to lower Crude Palm oil price. As such, revenue shed 5.17% y/y to N15.40billion in 9M 2019. Similarly, gross profit margin declined by 313bpsy/y to 76.13% during the same period. In the same vein, the jump in OPEX/ Sales by 549bps and a 52.83% rise in net finance cost drove the PBT margin down to 31.09% in 9M 2019 from 46.02% in 9M 2018. 

Summary And Outlook 

In conclusion, the results were headlined by lower pricing, which weighed on earnings. 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 recent border closure to support volume in the near term.  

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.

  Sources: Company financials, Investment One Research