Culled—Proshare

August 24, 2020

by  FBNQuest Research

Outperform rating maintained

Presco’s Q2 2020 earnings were up significantly y/y, recovering from a -16% y/y decline in the prior quarter. A 71% y/y improvement in sales and gross margin expansion (+964bps y/y) helped the firm’s performance in Q2. Earnings beat our forecast by 48%. Similar to competition, the forced lockdown put in place during the quarter had no negative impact on sales. We now expect that consumer demand for crude palm oil and its derivatives will remain strong through H2. Presco’s strategy to increase its production capacity and lower energy costs, which has now started to yield results, remains on track.

Last year, Presco completed the construction of a 350 tonne (te)/day palm kernel crushing plant and a new 30te palm kernel shell boiler. The boiler provides relatively cheaper energy vis-a-vis diesel or other fossil fuels. Additionally, the firm expanded its palm oil mill by 30te of fresh fruit bunches (FFB)/hour to 90 FFB/hr. Given the scale of investments in the prior year and as a result of the pandemic, we continue to expect a moderation in capex for 2020E.

We forecast capex of around N5.8bn. We also expect to see the positive impact from capital investments come through in sales from 2021 onwards. For 2020, we forecast sales and PBT growth of 22% y/y and 56% y/y respectively. Overall, our earnings forecast over the 2020-21E period is up by around 25%.

Our new price target of N69.0 is up by a similar magnitude and implies an upside potential of 35% at current levels. As such, we retain our Outperform rating on the stock. Presco shares have gained 23% over the last month vs the NSE ASI’s +3%. The stock is trading on a 2020 P/E of 7.7x for an EPS growth of 5% in 2021E.

Strong Q2 2020 results as earnings improved significantly y/y

In Q2, sales of N8.1bn grew 65% y/y while PBT advanced by around 295% y/y to N3.4bn. The more significant growth on the profit line was primarily driven a gross margin expansion of 964bps y/y to 59.9%. A double-digit y/y decline in operating expenses and a -10% y/y reduction in net finance expenses also helped, but to a lesser extent.

Sequentially, while sales grew 50% q/q, PBT and PAT were up 45% q/q and 44% q/q respectively. Compared with our estimates, sales beat by 77% while PAT came in ahead of our estimate by 48%.