October 7, 2024/CSL Research
Presco Plc (PRESCO) reported strong performance in its half-year 2024 results, with Revenue growing by an impressive 83.1% y/y to N88.02bn, up from N48.07bn in H1 2023. The significant y/y revenue growth was largely driven by increased local demand for crude palm oil (CPO) for both industrial and household uses, supported by price adjustments. The average depreciation of the Naira by 64.1% led to a notable increase in domestic prices. Additionally, global CPO prices rose by 6.2% to US$845 per metric tonne during the first half of 2024, further boosting revenue growth.
Presco Plc reported a slower increase in Cost of Sales compared to its revenue growth, rising by 38.6% y/y to N22.43bn in H1 2024, up from N16.18bn in H1 2023. Despite the increase in costs, the company’s cost management improved, with the Cost of Goods Sold (COGS) to sales ratio declining by 8.2 percentage points to 25.5%, and the Operating Expenses (OPEX) to sales ratio falling by 3.6 percentage points to 16.8%. Most notably, expenses for raw materials consumed (RMC) plunged to just N29.5m in H1 2024, a sharp drop from N1.8bn in H1 2023. This decrease was due to the decision by SIAT Nigeria Limited to stop purchasing fresh fruit bunches and palm kernel nuts from out-growers starting in January 2024. As a result, Presco’s gross margin improved significantly, rising to 74.5% in H1 2024, compared to 66.3% in H1 2023.
On June 4, Presco Plc informed the Nigerian Exchange (NGX) of its intent to acquire a 100% stake in Ghana Oil Palm Development Company (GOPDC), a member of the Siat Group of Belgium. The acquisition is valued at approximately US$124.92 million, involving the purchase of 70,580,000 ordinary shares of GOPDC at a price of US$1.77 per share. An initial consideration of US$64.96 million will be required, with the remaining balance to be settled at a later date. This acquisition would increase Presco’s total plantation size to 64,510 hectares, with 36,628 hectares of planted area. Additionally, the combined production capacity is estimated at 81,500 metric tonnes per year, further strengthening Presco’s position as a leading oil producer in Africa.
We maintain a bullish long-term outlook on Presco due to its strong insulation from foreign exchange volatility, the defensive nature of its products, and its expanding production capacity and distribution network. Accordingly, we retain our Buy recommendation on the stock, raising our price target to N571.7/s, up from N307/s. The stock is currently trading at N485.4/s. Our price target is derived from a 60/40 blend of discounted cash flow (DCF) valuation and relative valuation estimates.
Stellar top-line & controlled COGS
Presco Plc (PRESCO) reported strong performance in its half-year 2024 results, with Revenue growing by an impressive 83.1% y/y to N88.02bn, up from N48.07bn in H1 2023. On a q/q basis, Revenue saw a modest increase of 6.9%, rising to N45.48bn in Q2 2024 from N42.55bn in Q1 2024. The significant y/y revenue growth was largely driven by increased local demand for crude palm oil (CPO) for both industrial and household uses, supported by price adjustments. The average depreciation of the Naira by 64.1% led to a notable increase in domestic prices. Additionally, global CPO prices rose by 6.2% to US$845 per metric tonne during the first half of 2024, further boosting revenue growth. With H1 2024 reported Revenue figure at 92.6% of our initial FY 2024 forecast, we have revised our FY Revenue forecast to N151.58bn from previous forecast of N95.2bn. The revision was necessitated by the impressive half-year performance, higher local CPO prices supported by the weaker Naira, and a marginal adjustment to volume growth expectation.
Despite heightened inflation and currency devaluation, Presco Plc reported a slower increase in Cost of Sales compared to its Revenue growth, rising by 38.6% y/y to N22.43bn in H1 2024, up from N16.18bn in H1 2023. On a q/q basis, however, Cost of Sales saw a significant jump of 56.4%, reaching N13.68bn in Q2 2024, compared to N8.75bn in Q1 2024. This sharp quarterly rise was largely attributed to heightened oil palm plantation activities in preparation for the dry season.
Despite the increase in costs, the company’s cost management improved, with the Cost of Goods Sold (COGS) to sales ratio declining by 8.2 percentage points to 25.5%, and the Operating Expenses (OPEX) to sales ratio falling by 3.6 percentage points to 16.8%. Most notably, expenses for raw materials consumed (RMC) plunged to just N29.5m in H1 2024, a sharp drop from N1.8bn in H1 2023.
This decrease was due to the decision by SIAT Nigeria Limited to stop purchasing fresh fruit bunches and palm kernel nuts from out-growers starting in January 2024. As a result, Presco’s gross margin improved significantly, rising to 74.5% in H1 2024, compared to 66.3% in H1 2023.We retain our FY 2024 Cost of Sales forecast of N45.23bn.
Despite growth in Operating Expenses due to a high-cost business environment—rising by 51.1% y/y to N14.8bn, up from N9.8bn in H1 2023—Presco Plc (PRESCO) saw growth in its EBITDA margin, which increased by 11.7ppts to 57.7%. Overall, the company reported an Operating Profit of N50.79bn in the first half of 2024, a significant 130% y/y increase. However, in the second quarter of 2024, Operating Profit declined by 7.3% q/q to N24.4bn, down from N26.36bn in Q1 2024. We retain our FY 2024 Operating expenses (OPEX) forecast of N28.61bn.
PRESCO reported a significant increase in Finance Income, which rose to N382 million in H1 2024 from N8.62 million in H1 2023. This increase was primarily driven by higher interest earnings on the company’s fixed deposit balances. Meanwhile, Finance Costs, which include interest expenses on loans and overdrafts, increased by 8.9% y/y to N4.42bn, up from N4.06bn in the same period last year. The company also reported a foreign exchange (FX) gain of N3.68bn for the first half of 2024, compared to an FX gain of N2.86bn in H1 2023. However, in Q2 2024, an FX loss of N1.71bn was reported.
Overall, the business reported N38.88bn in Profit After Tax, up 157.8% y/y. Q/q, PAT was down by 38.4% to N14.82bn from N24.06bn (Q1 2024). We forecast a N57.3bn in Profit After Tax for FY 2024.
Business strategy
Early June, Presco Plc informed the Nigerian Exchange (NGX) of its intent to acquire a 100% stake in Ghana Oil Palm Development Company (GOPDC), a member of the Siat Group of Belgium. GOPDC is an integrated agro-industrial company specializing in the cultivation of oil palm, as well as the extraction of crude palm oil and palm kernel oil. It also produces refined specialty oils for the food industry. As GOPDC is part of the Société d’Investissement pour l’Agriculture Tropicale (SIAT) Belgium, a key shareholder in Presco Plc, this acquisition qualifies as a related-party transaction.
Ghana Oil Palm Development Company (GOPDC) was incorporated in Ghana on 6 December 1995, and operates from two estates in the Eastern Region of the country. The company manages an estimated oil palm plantation area of 21,000 hectares, with 13,000 hectares already developed. GOPDC’s processing facilities include a 60 metric tonnes per hour fresh fruit palm oil mill, a 60 metric tonnes per day palm kernel mill, a 100 metric tonnes per day refinery and fractionation plant, and a palm kernel cake pellet plant. The company currently has an annual production capacity of 35,000 metric tonnes of palm oil and palm kernel oil.
The acquisition is valued at approximately US$124.92 million, involving the purchase of 70,580,000 ordinary shares of GOPDC at a price of US$1.77 per share. An initial consideration of US$64.96 million will be required, with the remaining balance to be settled at a later date. This acquisition would increase Presco’s total plantation size to 64,510 hectares, with 36,628 hectares of planted area. Additionally, the combined production capacity is estimated at 81,500 metric tonnes per year, further strengthening Presco’s position as a leading oil producer in Africa.
Valuation:
We retain our BUY recommendation on Presco and raise our price target to N571.7/s up from N307/s. Current price is N485.4/s. The stock is trading at a discount to EMEA peer average of 9.4x, with its current EV/EBITDA of 5.7x. We derive our price target using a 60/40 blend of DCF valuation and relative valuation estimates